To lease or buy when I have the cash in my RSP

Question

I am retired, collecting a pension, CPP & OAS. I also have money in my RSP, which becomes taxable when I withdraw it. I purchased, for cash & a trade-in, a 2014 BMW SUV. Sale price was $39000. This vehicle is now coming up to the 4 year warranty & full servicing anniversary, which means it will no longer covered. I believe it is probably worth $25000 as a trade-in on a purchase price of approximately $50000 or so. I would now like to replace it with a newer model BMW SUV which will again be covered for servicing & warranty. My dilemma is - do I withdraw funds from my RSP & have my OAS clawed back or do I lease the new purchase?

Answer 1

Any OAS clawback you might incur by withdrawing additional RRSP amounts, would certainly wipe out any ownership cost-benefit analysis comparing buying vs leasing. Further, you quite possibly would be drawing additional income at higher tax bracket than you normally would, so it isn't true to say that drawing RRSP's today is the same as drawing tomorrow - you want to use up your bottom tax brackets as much as you can, without going into new brackets.

A more complete answer would require knowing your full income amounts and any other tax impacts, but I would find it almost impossible that buying through use of RRSP-drawn funds is preferential to simply leasing and making payments over time.

Of course you could buy the car and finance, and still take out only small amounts to pay the loan over time. There would be little difference in your case vs the regular lease vs finance case. If you are anti-debt, consider that leasing is just another form of debt, and either way you end up paying interest for the use of someone else's funds.

All in all - just don't buy it in cash.

Answer 2

Presumably if you are retired you will be drawing down from your RRSP at some point, so the issue of whether to do it now or later becomes a cost benefit analysis. Assuming your income is unlikely to change in the future most of the variables cancel out and it becomes a question of whether you are likely to pay more on a lease over that period of time compared to the growth of whatever investments you are holding in your RRSP.

So the calculation should be (Additional cost of leasing a vehicle) - ($25000 * whatever rate your RRSP has been growing by historically).

*Note: this answer ignores the effects of reduced taxes on capital gains from dividends your investments may be paying out as the effect should be marginal.