London, ON: In the next few weeks, many Canadians will wonder if they should take out a big RRSP loan to catch up on their unused contribution room that has built up over the years. On average, Canadians only use about 10% of their RRSP room, and now have over $210 billion in unused contributions carried forward.

Unfortunately, the advice on RRSP catch-up loans varies widely, only complicating the matter. "Many advisors and experts discourage RRSP loans that cannot be paid off within a year," says Talbot Stevens, financial educator and author of the new bestselling booklet Dispelling the Myths of Borrowing to Invest."But the reality is that as long as you can handle the loan payments, investors are almost always better off using a larger RRSP loan to get more dollars growing tax-deferred as soon as possible. This is true even if it takes you ten years to pay off the loan, and you don't make any RRSP contributions during that period."

Even when investment returns are lower than the interest expense on the RRSP loan, the "catch-up" RRSP strategy generally produces a larger retirement fund because the loan forces a higher level of commitment. Once started, the loan becomes a forced savings plan.

Before the merits of a "catch-up" RRSP loan can be assessed, it is important to recognize the existence of five RRSP refund strategies, each reflecting different levels of commitment to the individual's retirement goal.

The most common RRSP refund strategy is to spend the refund, perhaps on a summer vacation. Those more committed to their retirement goals might reinvest all of the refund back into their RRSP. A third approach is what Stevens calls a "gross-up" strategy, that can potentially double the RRSP contribution. Someone in a 50% tax bracket with $1,000 to invest could temporarily borrow an extra $1,000 to "gross-up" their RRSP contribution to $2,000. The $2,000 contribution produces a $1,000 refund that completely and almost immediately repays the $1,000 loan.

The fourth RRSP refund strategy is using an RRSP loan to "top-up" your annual contribution. These loans are small and normally paid off within a year. The fifth is using a larger "catch-up" loan that might take 10 or more years to repay.

Let's say that Sue is well into the 40% tax bracket and has $20,000 of unused RRSP contribution room available. If she gets a $20,000 RRSP "catch-up" loan, she will get an $8,000 refund that can immediately reduce the loan to $12,000. With an 8% non-deductible interest expense, the $12,000 can be paid off over 10 years with annual payments of $1,656.

Paying $1,656 a year for 10 years to pay off the remaining $12,000 of the $20,000 "catch-up" loan can be compared to having the same cashflow invested in RRSPs where the refund is spent, reinvested, or grossed up. The table summarizes the RRSP value for each strategy after 10 years.

When investment returns match or exceed the interest expense on the RRSP loan, the "catch-up" strategy is as good as or better than not using a big loan to boost your RRSP. "The interesting thing is that the "catch-up" strategy is often better even when returns are lower than the non-deductible cost of borrowing," notes Stevens.

In the example, when RRSP returns are only 6%, 2% less than the 8% cost of borrowing, the ‘catch-up' strategy produces about 10% more than investing the same cashflow into RRSPs annually and all of the refunds each of the 10 years.

"The biggest benefit of the RRSP catch-up loan strategy is NOT the probability that you will produce a larger RRSP," says Stevens. "Even if returns are lower than the cost of borrowing, the "catch-up" loan is still generally better because it forces a higher level of commitment to the individual's retirement goal. Once started, the loan becomes a forced savings plan that generally results in a larger RRSP than contributing the same amount annually where every penny of every refund is reinvested - and very few people have that level of discipline."

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Talbot Stevens is a financial educator, industry consultant, and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources menu of www.TalbotStevens.com. For more information, contact Judy Culford, Communications Director for Talbot Stevens, by calling (519) 663-2252, or emailing judy@TalbotStevens.com.