Inheritance and loans question

[Vorret]

Do we have anyone good in finance here? Here's my situation...

My mom died on June 8th and while she wasn't rich she did have some insurance and if I understand everything properly as sole beneficiary I would be getting 65,000$ that I'm mostly going to stash away in a retirement fund.

But... I took an interest-free 17,000$ loan to buy a house last year, for those of you not living in Canada here's how it works :

You use part of your retirement money (or all of it) as a loan that you can use to either lower the price of your house or use as a mandatory 5% down payment and you need to pay it back over 15 years and if you don't pay they take it off you when you do your taxes.

I can easily pay back the 17,000$ over the 15 years period that's not a problem but it means that I won't be putting much money away for retirement in the meantime so should I use part of the 65,000$ to pay back the 17,000$ and put what I would have been paying in my retirement fund or stash the whole 65,000$ and start making interest on it since the loan is interest-free

I'm confused as to what the best solution is they seem fairly similar in the end as long as I put the money away if I pay back the loan and it's less of a hassle if I ever face some monetary problem.

Anyway just looking for thoughts on the matter ! Thanks

[Isgrimnur]

The issue with the loan is not the interest-free nature of it, it's that you're losing out on the compounding growth of that money for thee years, which you're then trying to replace by investing that money yourself.

[Vorret]

The loan is technically dead money is that what you're saying? So paying it back and investing what I would have paid on the loan on top of what I'm already saving is the best idea here?

[Scuzz]

It seems to me that if you pay back an interest free loan you then lose the ability to make money on that money anyway, so just finding a decent investment with the inheritance would be the best thing to do. At least paying monthly you are only losing the earning power one month at a time, whereas if you pay it off lump sum you have wiped out all earnings for that money.

If you were paying down a credit card that would be different, but paying down a zero percent loan ahead of time really makes no sense to me.

[LawBeefaroni]

Yeah, keep the zero interest loan. Maybe finish paying it off a year or two early so you don't run into any issues with late payment but the is no point in taking cash in hand to pay off a zero interest loan. The only thing I can think of is if you get taxed on the $65K and using some of it to pay off the loan somehow gives you tax advantage.


Sorry about your mom.

[LordMortis]

Sorry for your loss and what it must be putting you through.


I couldn't begin to speculate on Canadian tax, retirement, mortgage, and inheritance laws.

Traditional wisdom in the US has been you keep mortgage debt because you can write it off. You put money in retirement funds to defer taxes to when you make less money and can be taxed less or when possible put money into retirement tax shelter where it won't be taxed at all. Inheritance money can be protected from taxes and probate by some level through trusts but that's a foreign language to me.

For my purposes I paid down my mortgage because I wasn't see the tax benefit of "good debt". I wasn't able to get better rates than 5.5% and I wanted the peace of mind of having that monkey off my back. That universally accepted as a bid idea because I should have been able to leverage that money to make more than 5.5% with wise investing. The thing is, there is no wise investing SLA out there. The best you can get is government backed saving (right now good luck beating 5.5%) or contracts with insurance companies to pay you back money at a fixed rate.

So you have an interest free loan against your retirement, what does that mean? Does that mean that 17,000 is pulled from investment and yields nothing? Does that mean $17,000 free money until you retire? If the money is money you owe yourself but is not being invested then the question becomes to you prefer it to be invested through the constraints of your retirement plan, do you prefer it to be liquid, do you prefer it to be invested through the constraints of self investing? These are likely mostly tax questions. If it's free money until you retire, then I see no reason to pay it down. If it's something else, then I need more inputs.

In the US you can also take out loans against your 401k (most business backed retirement plans nowadays) for many reasons and then you have to pay yourself back with interest. I'm not sure how that works or how "interest" is defined. Aside from having to pay yourself interest, you have to make sure you don't lose your job. If you do then you can find you are in default with the company's 401k holder. Then you get screwed on the interest and have to pay the taxes and 10% early withdraw fee. But that's the US and specifically the 401k in the US.

[Max Peck]

I believe he is talking about the Home Buyers' Plan, which isn't so much an interest-free loan as it is a way to leverage his existing registered retirement savings plan to help purchase a house. Until he repays it, that chunk of his RRSP isn't generating any tax-sheltered growth.

If it was me, I'd pay it off to get the money back in my RRSP so that I could invest it and let it grow without being taxed.

[LordMortis]

Until he repays it, that chunk of his RRSP isn't generating any tax-sheltered growth.

This is in the ballpark of what I assumed and did not know. If money is tax sheltered, you want to build a retirement, you don't have other ways to shelter that money more in your control, and your are happy with how it is invested, then pay it down.

It always seems to come down to reducing your tax burden in the best legal way possible.

[Scuzz]

I believe he is talking about the Home Buyers' Plan, which isn't so much an interest-free loan as it is a way to leverage his existing registered retirement savings plan to help purchase a house. Until he repays it, that chunk of his RRSP isn't generating any tax-sheltered growth.

If it was me, I'd pay it off to get the money back in my RRSP so that I could invest it and let it grow without being taxed.

Yea, Lordmortis brought that idea up and if that is the case then maybe based on what the "tax sheltered growth" is paying that off might be the best option. It would also depend on how aggressive (hard in this market) you would be with the actual inheritance money.

[RunningMn9]

To echo some other thoughts. Taking money out of a retirement account isn’t an interest-free loan.

You are taking 17000 of the most valuable retirement dollars that you have and using them for something else. Every dollar you pay back is worth less than the dollar you borrowed. The interest you are paying is equivalent to the money that it would have gained had you not spent it.

That’s growth in a tax shelter. Putting that money back in your retirement account isn’t spending it or losing it. It’s getting it back growing tax free again.

[Vorret]

Thanks guys, I don't know why I've been seeing it as a tax free loan, also as far as I know the inheritance is protected from tax EXCEPT a 2500$ I get from the government that will go against my revenue.

Also my retirement money, since it's a long time away, is stashed in aggresive funds overall it's been making +- 10% a year (2008 and 2020 are obviously bad years but you get the idea).

So I think I'll pay it back so I have that monkey off my back and invest the rest in the same account to get it to grow as fast as possible and invest what I would have been paying back anyway in that same account.

[RunningMn9]

The inheritance is tax exempt, but the growth on investing it isn't.

[Vorret]

Not if I put it in a retirement fund.

I have two options a REER that lowers my revenu and gives me back money at the end of the year but when you take money out of it it goes back on your revenu (I think that's fairly standard everywhere).
or
CELI which doesn't lower my revenu but I can also take money out of it any time I want and it's not taxed at any time and is invested the same way my REER is so it's kinda cool and usefull in an emergency.

Kicker is, the CELI is capped at 5 grand a year not that it matters in my case I've never put much money in it so I have alot of retroactive 5K I can put in.

[Scuzz]

Thanks guys, I don't know why I've been seeing it as a tax free loan, also as far as I know the inheritance is protected from tax EXCEPT a 2500$ I get from the government that will go against my revenue.

Also my retirement money, since it's a long time away, is stashed in aggresive funds overall it's been making +- 10% a year (2008 and 2020 are obviously bad years but you get the idea).

So I think I'll pay it back so I have that monkey off my back and invest the rest in the same account to get it to grow as fast as possible and invest what I would have been paying back anyway in that same account.

If your retirement is earning 10% then that is a no brainer.

[LordMortis]

Thanks guys, I don't know why I've been seeing it as a tax free loan, also as far as I know the inheritance is protected from tax EXCEPT a 2500$ I get from the government that will go against my revenue.

Also my retirement money, since it's a long time away, is stashed in aggresive funds overall it's been making +- 10% a year (2008 and 2020 are obviously bad years but you get the idea).

So I think I'll pay it back so I have that monkey off my back and invest the rest in the same account to get it to grow as fast as possible and invest what I would have been paying back anyway in that same account.

If your retirement is earning 10% then that is a no brainer.

If I could count on 10% return I'd call in retirement tomorrow. It wouldn't even have to be tax sheltered.

[Newcastle]

Vorret,

First of all sorry for your loss. It sucks to lose a parent. That just sucks. I wish you the best in the grieving process. Take time for yourself and remember the good times w/ your mother.

pay off the house loan.

First of all....absolutely ZERO debt.

1. Its over. You dont have to deal with it or the paperwork associated w/ it.
2. You are not guaranteed to get 10% a year. The stock market is a fickle beast. You will hit years where you wont hit 10% growth. Unless you actively manage your money. Getting 10% gain is good, but is it sustainable? Especially with the current economy being battered by the Corona virus {and yes the US stock market is doing very well] but there is a day of reckoning coming. IMF and other agencies are predicting economies that are going to shrink.
3. It frees up capital in the future to pursue future goals. You wont be hamstrung by this payment.If you dont owe anything on the house, you can get other loans to finance other objectives; maybe purchasing a second home somewhere. You dont know what those are now, but having that extra bit of cash will be helpful.
4. If you lose your job; your GF loses her job you still have your home.
5. If you become disabled or your GF becomes disabled; you still have your home.
6. If you or your GF die; you still have your home.


I got an inheritance a few years back and was stuck on wether to pay down a debt [ all of it, or do it a little at a time]. I paid off the debt, and haven't looked back. Knowing I didn't have to make those payments anymore was a huge relief.

Yes, its an interest free payment, but its also a constant drain on your finances. You will need to constantly pay the thing for the next 15 years.

Oh did I mention you will have ZERO debt.

[Scuzz]

Vorret,

First of all sorry for your loss. It sucks to lose a parent. That just sucks. I wish you the best in the grieving process. Take time for yourself and remember the good times w/ your mother.

pay off the house loan.

First of all....absolutely ZERO debt.

1. Its over. You dont have to deal with it or the paperwork associated w/ it.
2. You are not guaranteed to get 10% a year. The stock market is a fickle beast. You will hit years where you wont hit 10% growth. Unless you actively manage your money. Getting 10% gain is good, but is it sustainable? Especially with the current economy being battered by the Corona virus {and yes the US stock market is doing very well] but there is a day of reckoning coming. IMF and other agencies are predicting economies that are going to shrink.
3. It frees up capital in the future to pursue future goals. You wont be hamstrung by this payment.If you dont owe anything on the house, you can get other loans to finance other objectives; maybe purchasing a second home somewhere. You dont know what those are now, but having that extra bit of cash will be helpful.
4. If you lose your job; your GF loses her job you still have your home.
5. If you become disabled or your GF becomes disabled; you still have your home.
6. If you or your GF die; you still have your home.


I got an inheritance a few years back and was stuck on wether to pay down a debt [ all of it, or do it a little at a time]. I paid off the debt, and haven't looked back. Knowing I didn't have to make those payments anymore was a huge relief.

Yes, its an interest free payment, but its also a constant drain on your finances. You will need to constantly pay the thing for the next 15 years.

Oh did I mention you will have ZERO debt.

We have actually constantly refinanced when the opportunity has arisen. For one, home mortgage loans are very cheap right now, much cheaper than credit card debt or vehicle loans, for the most part. Debt by itself is not a bad thing. Depending on where you live and what you owe your property taxes may be more than your annual mortgage payments. I think the old thing about being mortgage free is over rated now. High home costs have contributed to that.

[Victoria Raverna]

If it is really 0% interest loan from other then it is stupid to pay it faster than what you have to.

But if you're borrowing from yourself (your retirement fund) so that it'll reduce the balance of your retirement fund that is making on average 10% interest then it is not a 0% interest loan, it is a 10% interest loan.

When it comes to paying off loan or not, you compare the interest, is the interest of the loan is higher than what interest/profit you can get from investing the money? If the loan interest is higher, then pay off the loan instead of investing it. If the investment can earn you higher than the loan interest, then don't pay off the loan.