What is an RRSP Loan?
When you borrow money from the bank in order to contribute to your RRSPs, you are using an RRSP loan. There are different types available. Some need to be paid off within a year, while others you can pay off over a much longer time period. You will often be given a more favorable interest rate if you have your RRSP at the same financial institution that grants you the loan.
There are some things you should consider before taking out an RRSP loan:
1. Can you afford to take on more debt right now? Consider your existing debt responsibilities. Would adding to them make your cash flow even tighter?
2. If you are currently carrying high interest debt, you would probably be better off working on paying that off instead of contributing to RRSPs.
3. Are the rates of return on your investments within your RRSP going to be higher than your interest rate on your RRSP loan? There’s no way to know for sure, and there are certainly no guarantees. So, in effect, you could be paying a higher price to borrow than you realize.
4. Will your tax refund be enough to allow you to pay off the RRSP loan in full? Some people borrow money in the form of an RRSP loan in order to maximize the tax benefits, and then they are able to pay off the total loan using their tax refund, but the tax refund isn’t always enough to cover the loan plus interest, so this is something you definitely need to figure out in advance.
5. Are you earning enough income to merit borrowing to contribute to an RRSP? You may not even be paying enough income tax to make it worthwhile to contribute to an RRSP right now.
Contributing to your RRSP allows you to save more for your retirement. As long as you can afford to make the RRSP loan payments and you have the discipline to use your tax refund in order to repay the loan, then you are on the right track, and an RRSP loan may be okay for you. However, in most instances it is probably wise to steer clear of RRSP loans.
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