Why RRSP loans are in style

Thinking of catching up on your RRSP contribution space? An RRSP loan could help.

RRSPs 101

RRSPs are a very powerful tool to save for retirement and if your household earns more than $50,000 per year, you should have them.

Every year you can contribute up to 18 per cent of your income (to a maximum – see below) and, if you don’t use up the available room, it carries forward. You have until March 1st, 2017 to make your contribution and have it count for the 2016 tax year.

Maximum RRSP contribution limits:

2014 – $24,270

2015 – $24,930

2016 – $25,370

2017 – $26,010

If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.

The Benefits of an RRSP Loan

The largest benefit of an RRSP loan is that you can use it to contribute to your RRSP, put that money to work through smart investing, and earn compounded returns. AND, you’ll pay less in taxes when you file you 2016 tax return.

Let’s say you borrow $10,000 to maximize your RRSP contribution room at age 30. That $10,000 compounded at 9 per cent for 25 years adds up to $86,000 before tax when you’re 55. Meanwhile, your $10,000 RRSP loan at 6 per cent interest, paid off over 12 months, would cost you less than $350 in interest.

You see, the growth in the RRSP far outweighs the cost of the RRSP loan. That’s why RRSP loans are popular.

If you’re wondering what an RRSP loan will cost you, calculate it. We like the borrowing calculator on BankRate.com.

Criteria to Follow for an RRSP Loan

An RRSP loan does make sense if you;

  • have the contribution room available within your RRSP – refer to your 2015 Notice of Assessment or sign up for the CRA’s My Account – both will tell you how much you can put into your RRSP;
  • can afford to pay it off within two years;
  • have an income more than $50,000 per year.

An RRSP loan does not make sense if you;

  • have carried a credit card balance for more than 60 days in the past year;
  • have other loans like vehicle or personal consolidation loans costing more than 4.5 per cent in interest – pay off higher-interest debts first.

Alternatives to RRSP Loans

If you own a home, you can apply for a secured line of credit to access up to 80 percent of your home’s equity (home value minus the mortgage). This option provides a very low interest rate and you can pay it back however you’d like – monthly installments or lump sum contributions – so long as you cover the interest charges each month.

The Fatty Disclaimer

Keep in mind that the credit applications for an RRSP loan are subject to meeting the financial institution’s lending criteria.

Using borrowed money to finance the purchase of investments within your RRSP is riskier than using cash. So, make sure you’re comfortable with this risk. If you borrow to invest in your RRSP, negotiate for the best interest rate, read the fine print on the contract, and ensure you can afford the monthly payments.