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Saving for retirement

February 13, 2019

Should I borrow to contribute to my RRSP?

Who isn’t cash-strapped these days? One solution is borrowing to invest with an RRSP loan. But it’s not for everyone.

Whether it’s the mortgage, saving for a child’s post-secondary education, or simply an unexpected repair to the car or house, there’s no shortage of things competing for our hard-earned dough. All too often, saving for retirement can end up being pushed aside.

What’s an RRSP loan?

Many Canadians struggle with making regular contributions to their registered retirement savings plans (RRSPs). They have no shortage of RRSP contribution room, just not the funds to put in their RRSPs.

But there’s a way you can play catch-up: borrow to invest. In today’s low-interest environment, an RRSP loan can work well, provided you pay it off quickly. And the beauty of an RRSP loan is that if it reduces your tax bill and results in a refund from the Canada Revenue Agency, you can then use that money to partially or entirely repay the debt.

Whether you’re a prime candidate for an RRSP loan depends on your age (20s and 30s are best), your tax bracket (the higher, the better) and your ability to pay down debt.

How does an RRSP loan work?

Let’s look at a practical example of how an RRSP loan works. Caden is 35 years old and has a marginal tax rate of 40%. He has earmarked $4,500 to contribute to his RRSP. If Caden borrows $3,000 to add to his intended $4,500 contribution, his total refund comes out to the same amount as the loan ($4,500 + $3,000 = $7,500 x 40% = $3,000). That lets him pay off the loan right away with minimal interest. A bigger RRSP contribution also means more money to compound over the 30 years until Caden plans to retire, so his portfolio could be larger overall.

Think it may take you a while to pay off the loan? Financial experts recommend investing for the long term (10 or more years) in products (usually equities) that achieve a higher rate of return over time than the interest rate of your loan. Otherwise, the interest on the loan could outpace what you make on your investments.

Is an RRSP loan right for you?

There’s no question an RRSP loan is not the right solution for everyone. For some, a better idea than taking on additional debt is to set up an automatic RRSP contribution plan. This will ensure a portion of your pay is immediately and regularly contributed to your RRSP. While it won’t let you max out your RRSP contribution this year, it will help you gradually build up your RRSP without going into debt.

Be sure to discuss your options with an advisor before committing to a loan.

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