Borrow to Max Out Contributions? (RDSP)

by bigcajunman on February 20, 2013

Many folks think about this for their RRSP however what about for your child’s RDSP?

Hello? Get my Broker on the Bunny Phone!

The Feds sent us our yearly statement for our son’s RDSP, with explanations of a few rule changes which were quite useful. The very interesting paragraph was:

As regular contributions to RDSP may not always be possible, the Government of Canada introduced legislation provisions allowing the “carry-forward” of Grant and Bond eligibility from prior years. These provisions allow Holders to apply for unused Grant and Bond eligibility from the past 10 years (for the moment, going back to 2008, the year that the RDSP became available)

The letter was actually quite well written, but the clincher was them including a table showing how much unused contribution room I had left, which was over $4000, however, if I put that much money in, the government will pay in grants over $6000 .

This begs a very interesting question: is it worth borrowing money to get to the Maximum contribution room (and thus get the maximum Grant)? Unlike RRSPs, this is not a tax break (i.e. it does not lower your net income), and the money put in we (my wife and I) never get to touch as it will be in my son’s name, however, putting $10K away in a savings vehicle for an 8 year old, might be a good way to ensure his future.

My guess is I will attempt to scrape together these funds, and borrow some money to get there, but I am curious to hear other folks opinions on this idea as well.

Yes, this flies in the face of my, Never borrow money ever rants that I have been on lately, however if you can get immediate over 100% pay back, shouldn’t you?

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Ken February 25, 2013 at 12:14 pm edit
In response to Buggy Whips, as it is not my expertise I will decline to give any recommendations
On the other hand, I am very comfortable with RDSP’s and most of the rules as they are continually changing and for the better.
You can follow my RDSP blogs at www. guelphfinancialservices. com.
I feel the 10 yr. rule is worth paying attention to as no one knows what life has in store and locking that money in for the family is quite important I think.
As for using a high interest rate credit card, it’s a bit iffy but is it can actually be up to a 300% return on your money for the first $500/yr.so if you could pay it off quickly it may make sense. Another scenario would be if you were closer to the end of the year, as it works on calendar time frame or the year you turn 49. This is the last time you can qualify for the grant so borrowing $3,750.00 (max) to get $10,500.00 (max) may make sense.
RDSP contributions are retroactive back to 2008 but $10,500 is the maximum the government will payout in any one year in total grant money. So be careful to not over contribute if funds are limited so you can get the maximum grants available over time.
As for where and what you can invest in. It is very restrictive but there is a choice from conservative to growth. You can also invest with the banks or Mackenzie Financial now. Mackenzie does allow monthly contribution to an RDSP. I feel that as demand grows on this subject you will see more mutual fund companies providing RDSP’s with growing options for investments. I am pushing them very hard to do so. I think Manulife would be a great option.
RDSP’s are a fairly simple concept but can get quite complicated on an individual basis. Especially when you start adding Henson Trusts and who will run them, will’s for the beneficiary and then add on an accountant. Also upcoming rule changes will allow RSP’s and RIF’s from caregivers to roll over tax free to the RDSP at death next year and more.
I hope this helps.
Ken.

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Barb February 24, 2013 at 1:16 am edit
Great to see a Canadian financial blogger posting about the RDSP; it’s hard to find anything investment-related on the subject!

Seems like a no-brainer to catch up on your contribution room as soon as possible to get those govt grants; where else can you make 200% ROI in a year? And Ken makes a good point about the 10-year withdrawal rule, though I suppose it depends how likely it is that you’ll need to tap the RDSP for your son in the next 10 or so years.
Not sure funding it on a high interest credit card makes sense, but a low-interest loan seems over a year or two seems worth it, given the juicy amt of govt contributions plus the compounded interest on them over time.

Curious whether you shopped around before choosing an RDSP provider? I’ve had mine at BMO since inception in 2008, but I’m now considering moving it, hoping for either wider investment options and/or lower MERs, etc. Seems like mutual funds are the only equity-based option; I haven’t found any institution offering ETFs (yet), which leads me to suspect they’re not an eligible investment for the RDSP. The question is why not?

ps: are you going to share that lead on International Buggy Whips?

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- bigcajunman February 24, 2013 at 1:48 pm edit
  I set mine up with TD, because at the time, that was where my investments were and they offered one, however, that has changed, so if there is a better deal, or (even better) a better methodology that allows for automatic payments, more easily, I might jump there! International Buggy Whips is yesterday’s hot tip, I am now thinking about Flintlock International Gun Masons…
  
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  - Barb February 24, 2013 at 2:00 pm edit
    If I find an RDSP provider that offers automatic payments, I’ll post it here.
    
    Flintlock International Gun Masons, eh? Seems like a subscription to your blog is in order for just the hot tips alone
    
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    - bigcajunman February 24, 2013 at 2:08 pm edit
      Good Lord, I’d hate to think someone actually planned their investments based solely on ANY blog, but in specific, THIS ONE! Holy Hanna!
Bet Crooks February 22, 2013 at 9:57 pm edit
I’m not clear on this. Do you have to put in the maximum this year to catch up? If not, why not add it gradually? Either way, it looks like it should be good news for a change!

PS the Facebook hack didn’t relate in any way to the TD phone call did it?!

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- bigcajunman February 23, 2013 at 6:29 am edit
  Not the hacker was on a mobile device in London, so I don’t think so
  
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Ken White February 22, 2013 at 9:47 am edit
I think this is a great idea. Not only are you getting a great return on the investment but you are getting the required 10 years out of the way as soon as possible in which the funds have to remain invested before you can withdraw without a penalty.
I have been trying to get the banks to do RDSP catch-up loans, as they do with RSP’s, for the last two years but they do not seem to be interested.
Good call.
Ken.

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LifeInsuranceCanada.com February 20, 2013 at 7:28 am edit
You should run not walk to do this. Put it on a credit card if you have to.

If you compare the scenario of borrowing to do this vs. saving to do it, the borrowing I expect will come out far ahead. While this at it’s core is leveraging, the upside is that the rate of return is guaranteed by the gov’t (unlike most leveraged investments that go into equities that have a huge potential downside).

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- bigcajunman February 20, 2013 at 8:05 am edit
  Ahhh, but since this is a self-directed investment mechanism, I could buy $5K worth of International Buggy Whips and make a killing!!!
  
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