Topic: How To Invest

Q: Pat, I am thinking of employing the “RRSP meltdown strategy.” In my case, though, I’m thinking of using your newsletters to choose the stocks I purchase with borrowed funds (rather than losing fees to a broker/advisor). What are your thoughts regarding this approach to an RPSP meltdown?

Article Excerpt

A: There are times when you may want to withdraw money from an RRSP. This has spawned one strategy, the RRSP meltdown, that can bring you more risk than reward. Here’s how the RRSP meltdown works: When you take money out of your RRSP, you have to pay tax on your withdrawal at the same rate as ordinary income in the year you make the withdrawal. However, under an RRSP meltdown strategy, you would offset the additional tax by taking out an investment loan and making the interest payments from funds you withdraw from your RRSP (the withdrawals must be equal to the interest payment). Since the interest on the loan is tax deductible, the tax on the RRSP withdrawal is cancelled out. This, in theory, results in zero tax owing on your withdrawal. You can then use the investment loan to buy dividend-paying stocks, which you would use to provide income during retirement. Dividend-paying stocks also have the advantage of being very…

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