Written on January 28, 2013 at 12:26 pm, by Rhonda Sherwood
The RRSP deadline for the 2012 tax year is approaching quickly. If you have not made your contribution for the year or you want to catch up on your unused contribution room, you may want to consider taking out an RRSP loan. This strategy can help to maximize your contribution and give the funds in your plan more time to grow on a tax-free basis. So does it make sense for you? It may be the right choice if:
- You just don’t have the cash to make an RRSP contribution.
- Maximizing your RRSP contribution would not only help decrease your taxes owed but might get you a healthy tax rebate.
- If you wisely use your tax refund to pay down the RRSP loan to eliminate it completely, making the interest costs to carry the loan almost nil.
- You use the rebate to pay down your high interest rate loans.
- The benefit of tax-deferred growth through the power of compounding would exceed your cost of borrowing.
- You do not have a company pension at retirement.
- You have not been maximizing your RRSP contributions in past years and so have little retirement savings.
- An RRSP loan helps you to be disciplined with your retirement savings.
Does it make sense to take out an RRSP loan?
An RRSP loan is a great vehicle to get you the monies you need at RRSP time. If you have not made a contribution in previous years, consider an RRSP loan to help you to get your retirement planning back on track. Regardless of whether you are saving for your retirement or just want a healthy tax rebate, speak with your financial advisor to see if a RRSP loan is right for you.
An RRSP loan isn’t for everyone.
It may not be a good strategy if:
- You are in debt overload and cannot handle another loan payment.
- You have too many high interest rate loans (credit cards).
- You are in such a low tax bracket you are paying little to no taxes.
- You are too close to retirement.
- You are carrying the loan for a long time frame (you should be paying it down annually unless it is a large loan to maximize unused contribution room).
- The return on your investments is far less than the interest you are paying on the loan.
The interest on an RRSP loan isn’t tax deductible either, so taking out an RRSP loan really does depend on your personal situation.
How do you get an RRSP loan?
You may be able to arrange for an RRSP loan from your financial institution or through your financial advisor. The loans are usually offered at preferred interest rates and with flexible terms, such as a line of credit or fixed payments.
If you decide that you want to borrow to top up your RRSP contribution room, you will then need to decide what kind of investment you want to purchase such as bonds/GICs, mutual funds and/or stocks/equities. The right mix will really depend on your age, the level of risk you are prepared to assume and your retirement goals.
This article is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication.