Many folks think about this for their RRSP however what about for your child’s RDSP? Should I borrow to Max Out contributions?
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?
Addendum
Given the grants paid are on the basis of my income until my son turns 19, I think borrowing is a bad idea (in hindsight). After he turns 19 I will revisit my plan for contributions to his RDSP, but for now, borrowing makes little sense.
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.