DO YOU REALLY NEED A RRSP?


RRSP

Assume you invest $100 monthly into a RRSP

 1.  Your contribution is tax deductible.
2.  Money grows sheltered in the plan.
3.  Value of Account at an assumed 12% compound interest:
      5 years ...................... $   7,440
      10 years .................... $  22,400
      20 years .................... $  96,107
4.  All of the above figures would be FULLY TAXABLE if cashed or income purchased.
5.  NONE of the money can be used for collateral or other purposes.
6.  Investments "Restricted" to 70% Canadian.
7.  Defined and restricted method of Income Payout. (Annuity or RRIF)


LEVERAGE PROGRAM

Assume you borrow $10,000 and pay monthly interest of $100 (12%)

 1.  Your 'contribution' is tax deductible.
2.  Money grows - tax sheltered in investment (unrealized capital gain less distributions).
3.  Value of Account at an assumed 12% compound interest:
      5 years ...................... $   17,623 (Less loan 10,000) - $ 7,623
      10 years .................... $   31,058 (Less loan 10,000) - $21,058
      20 years .................... $   96,463 (Less loan 10,000) - $86,463
4.  50% of ALL above figures would be TAX FREE less CNIL.(Interest paid)
5.  All of the money can be used for collateral or other purposes.
6.  Investment "Non-restricted" to any one country.
7.  FREEDOM OF CHOICE REGARDING TYPE, TIME AND METHOD OF INCOME PAYOUT.


Loan For Investment Examples

$30,000 Loan For Investment
Interest cost for 1 year (@10%)    $3,000
Tax Savings - (Interest is tax-deductible) i.e. 50% Tax Bracket    $1,500 ($125/month)
Cost of loan after tax saving    $1,500 ($125/month)
RESULTS:
Years
10%
12%
15%
5
 $48,315.30 $52,870.00 $60,340.72
10
 $77,812.27 $93,175.00 $121,366.73
15
 $125,317.45 $164,206.97 $244,111.85
20
 $201,825.00 $289,388.79 $490,966.12


Each $100,000 will provide a monthly income of $750 of preferred income on a 9% systematic withdrawal plan. It is completely flexible and can be indexed to inflation.(The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund or from the use of the asset allocation service.)

$100,000 Loan For Investment
Interest cost for 1 year (@10%)    $10,000
Tax Savings - (Interest is tax-deductible) i.e. 50% Tax Bracket    $5,000 ($417/month)
Cost of loan after tax saving    $5,000 ($417/month)
RESULTS:
Years
10%
12%
15%
5
 $161,512.00 $176,234.17 $201,135.72
10
 $259,374.25 $310,584.87 $404,555.77
15
 $417,724.82 $547,356.58 $813,706.16
20
 $672,749.99 $964,629.31 $1636,653.74


Each $100,000 will provide a monthly income of $750 of preferred income on a 9% systematic withdrawal plan. It is completely flexible and can be indexed to inflation.(The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment in the mutual fund or from the use of the asset allocation service.)

It is important that an investor proposing to borrow for the purchase of securities be aware that a purchase with borrowed monies involves greater risk than a purchase using cash resources only. To what extent a purchase using borrowed monies involves undue risk is a determination to be made by each purchaser and will vary depending on the circumstances of the purchaser and the securities purchased.

Check out my articles on this subject by clicking on the links below.

Money Matters - Financial Leverage

Money Matters - Alternatives to RRSP Investments