What would happen if Roxie took a five-year RRSP loan for $50,000 at 6% interest?
- Her monthly payments would equal $966 a month. Her income is high, so she’s comfortable paying that amount.
- Since she’s in the top tax bracket, Roxie will get a tax refund of $20,000 for her RRSP contribution.
- If she puts the refund toward her loan, it will take her less than three years to pay off that debt. That means she’ll pay only about $3,500 in interest on the loan.
That’s not all. If she invests wisely, the $50,000 Roxie puts into her RRSP may grow until she withdraws it. There’s no guarantee, of course. But if the money grows 5% a year, Roxie will have an extra $81,000 when she retires.
Her total profit: About $25,000 after paying her loan interest and investment costs!
Roxie decides what to do: Clearly, borrowing to catch up makes sense for Roxie if she chooses the right investments. Keep in mind that this is just an example. It does not show the impact of inflation on what she makes. Also, she may make more or less than 5% each year on her investments.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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