Following a recession that took a bite out of Canadians\u2019 RRSP contributions in 2009, catch-up loans can be a valuable tool to help get clients back on track this year.
Although RRSP loans have declined in popularity, thanks to the growing number of investors who put money into their registered plans every month, they are still an ideal option for some clients.
RRSP loans are available through the major banks, as well as through financial services institutions that serve the advi-sor channel, such as AGF Trust Co., <\/b> which is owned by Toronto-based AGF Management Ltd.; MRS Trust Co. <\/b>, a division of Mackenzie Financial Corp. of Toronto; Manulife Bank<\/b>, which is owned by Toronto-based Manulife Financial Corp.; and B2B Trust, <\/b> a subsidiary of Laurentian Bank of Canada in Montreal.
Catch-up loans should be used only if they fit within the context of a client\u2019s written financial plan, says Crystal Wong, senior regional manager with TD Waterhouse Financial Planning<\/b> in Calgary. \u201cSometimes, clients need to consider a carry-forward or catch-up RRSP loan in order to meet their retirement goals. The benefit to the advisor is helping the clients reach their goals sooner. [The loan] is another arrow in the advisor\u2019s quiver.\u201d
Most loan providers offer two categories of RRSP loans. One-year loans are designed to boost a client\u2019s contribution for that particular year. Longer-term loans are geared toward inves-tors who have built up a significant amount of carry-forward room over a number of years.@page_break@ Toronto-Dominion Bank<\/b>, for example, offers a one-year, top-up loan with both variable or fixed-rate options. The variable rate is prime plus 1%; the fixed rate is 4%. TD\u2019s longer-term, carry-forward version has a fixed rate of 5.5% over five years, or a variable rate of prime plus 1.5%.
Bank of Montreal <\/b> has a pair of offerings: a one-year loan for $1,000-$21,000 at a variable rate of prime plus 1%; and a \u201cretro activator\u201d loan with a minimum borrowing amount of $7,500 at a variable rate of prime plus 1% or a fixed rate of 9% over five years.
Royal Bank of Canada<\/b> offers loans of up to $50,000 to help clients reduce their carry-forward contribution room. If the loan is amortized over a year or less, interest is charged at prime only; for amortization of one year to 10 years, RBC charges prime plus 1.5%.
Rod Lowry, financial planner with RBC Wealth Management<\/b> in Winnipeg, says the preferred pricing rate is contingent upon clients placing their investments with RBC companies.
One possible benefit, he says, is for the client to take out a loan that\u2019s large enough to bump his or her taxable income down into the next lowest tax bracket. That will result in significant tax refund, which can outweigh the cost of the loan at today\u2019s low interest rates.
Bob Fast, BMO\u2019s area manager of personal banking in Winnipeg, says it\u2019s the advisor\u2019s role to recommend RRSP loans to clients. It\u2019s not uncommon, he says, for an advisor to raise the option of a catch-up loan to fund an RRSP, only to discover that clients are not aware that catch-up loans exist. \u201cThese vehicles can help clients in ways they didn\u2019t even think about,\u201d Fast says. \u201cThey can save money on taxes or improve their investment opportunities by doing something more immediate rather than slowly over time. When you can add value to a client\u2019s interaction with you in a way they didn\u2019t expect, it solidifies that relationship. You\u2019ve helped them in a way they didn\u2019t even know was possible.\u201d
RRSP loans aren\u2019t for everyone, Fast warns. If your client\u2019s cash flow is already tight, he says, he would recommend the client pass on taking out an RRSP loan, because the monthly payments could become difficult to
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