Author Topic: Using HELOC to Max out Tax Saving vehicles  (Read 1312 times)

TheAverageSo

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Using HELOC to Max out Tax Saving vehicles
« on: January 19, 2018, 01:15:40 PM »
Hi all,

I have a question for all you smarty pants out there regarding my income taxes.  To start, I'm Canadian so I'm not too sure on the differences from the US system, but my situation is this:

- Mortgage ($300k owing, home assessed at $950k)
- RRSP ($35K current), similar to 401k I believe
- TFSA ($5k current), similar to IRA I belive

I have unused amounts over the years I've been working that I have not maxed out. My RRSP stands at $50k contribution amount and TFSA is at $52k.  Now, question is... should I take out a HELOC or some other loan to put towards my RRSP and TFSA and use whatever I get back from my return and pay the loan back? Or should I use a HELOC to pay off my mortgage at 2.35% interest rate? 

I mention the HELOC to pay off the mortgage becasue I recently heard about the HELOC meathod to increase the principal payment thereby reducing the term I have a mortgage.  Any insight into this is much welcomed.  It blew my mind when I heard about this, and I had the feeling of kicking myself in the ass for not knowing this sooner.

RichMoose

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Re: Using HELOC to Max out Tax Saving vehicles
« Reply #1 on: January 19, 2018, 01:58:54 PM »
Hi all,

I have a question for all you smarty pants out there regarding my income taxes.  To start, I'm Canadian so I'm not too sure on the differences from the US system, but my situation is this:

- Mortgage ($300k owing, home assessed at $950k)
- RRSP ($35K current), similar to 401k I believe
- TFSA ($5k current), similar to IRA I belive

I have unused amounts over the years I've been working that I have not maxed out. My RRSP stands at $50k contribution amount and TFSA is at $52k.  Now, question is... should I take out a HELOC or some other loan to put towards my RRSP and TFSA and use whatever I get back from my return and pay the loan back? Or should I use a HELOC to pay off my mortgage at 2.35% interest rate? 

I mention the HELOC to pay off the mortgage becasue I recently heard about the HELOC meathod to increase the principal payment thereby reducing the term I have a mortgage.  Any insight into this is much welcomed.  It blew my mind when I heard about this, and I had the feeling of kicking myself in the ass for not knowing this sooner.
No you shouldn't use a HELOC to fill registered accounts. The interest would not be tax deductible. Just keep plugging away at saving and putting money into those registered accounts from your cash flow.
It may be worth checking out a temporary RRSP loan to top up an RRSP and the use the tax refund to pay the loan back. This is usually done in February so you don't hold the loan for a long time. You can run some numbers in this calculator to figure out the proper loan amount for your situation: http://www.dinkytown.net/java/RRSPLoan.html

You shouldn't use the HELOC to pay your mortgage either. Your HELOC rate is probably Prime +0.5% or +1.0%. This equals 3.95% or 4.45% currently, much higher than your 2.35% mortgage!

You might be referring to a Smith Manoeuvre strategy? This is an advanced strategy for high savers who are familiar with investing. Basically, it uses your house equity to convert your mortgage into a tax-deductible investment loan. Because it involves leveraging into investments, it's not for a beginner or the faint of heart. It requires a lot of discipline and a wide margin of safety to execute correctly and in a sustainable manner.

Prairie Stash

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Re: Using HELOC to Max out Tax Saving vehicles
« Reply #2 on: January 22, 2018, 03:31:33 PM »

I mention the HELOC to pay off the mortgage becasue I recently heard about the HELOC meathod to increase the principal payment thereby reducing the term I have a mortgage.  Any insight into this is much welcomed.  It blew my mind when I heard about this, and I had the feeling of kicking myself in the ass for not knowing this sooner.
I used the HELOC to pay down my mortgage faster. It was a different era (2010), falling rates. it doesn't work the same today.

How it worked was I paid an annual lump sum with my HELOC, which was at a lower interest rate then my mortgage. If you want to make additional payments against your mortgage you can then pay off the HELOC, assuming you can't pay extra directly towards the mortgage.

Eventually, you still need to pay it off or roll it into the new mortgage. It only works when rates are falling, not in today's rate climbing environment. Is this what you heard?

Telecaster

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Re: Using HELOC to Max out Tax Saving vehicles
« Reply #3 on: January 22, 2018, 03:44:26 PM »
Hi all,

I have a question for all you smarty pants out there regarding my income taxes.  To start, I'm Canadian so I'm not too sure on the differences from the US system, but my situation is this:

- Mortgage ($300k owing, home assessed at $950k)
- RRSP ($35K current), similar to 401k I believe
- TFSA ($5k current), similar to IRA I belive

I have unused amounts over the years I've been working that I have not maxed out. My RRSP stands at $50k contribution amount and TFSA is at $52k.  Now, question is... should I take out a HELOC or some other loan to put towards my RRSP and TFSA and use whatever I get back from my return and pay the loan back? Or should I use a HELOC to pay off my mortgage at 2.35% interest rate? 

I mention the HELOC to pay off the mortgage becasue I recently heard about the HELOC meathod to increase the principal payment thereby reducing the term I have a mortgage.  Any insight into this is much welcomed.  It blew my mind when I heard about this, and I had the feeling of kicking myself in the ass for not knowing this sooner.

You can do that.  You need to look at the amount of tax savings vs. the interest costs.  And be very disciplined about paying off the HELOC.  I've done it myself, and it absolutely can make sense under some circumstances. 

I've seen a couple site mention the HELOC of paying down the mortgage, and I really don't see how it helps much.    Basically, it takes advantage of the way mortgages are amortized (monthly) vs. the way HELOCs are amortized (daily).   But the proponents almost always (always?) either double count, or they don't do a strict A and B comparison, usually pointing the amount of mortgage interest saved, but neglecting the fact you can save mortgage interest by simply down the mortgage, or neglecting the HELOC interest paid.

If you run the numbers yourself, you find there can be a slight advantage to the HECLOC strategy, but it is a lot of karate for not much savings.