RRSP Express Loan. On-the-spot RRSP Loan. RRSP Maximizer Loan. These are some of the names banks are using to promote RRSP loans. It’s a win for them because they get to both make a loan and receive the proceeds in the form of an RRSP investment.
Can RRSP loans make sense? Sure. Are they for everybody? No.
Signs of being a good RRSP loan candidate are:
- You are already making RRSP contributions.
- You’ll see why below.
- You are able to pay back the loan within 12 months.
- This keeps interest costs, which are paid with after-tax dollars, more reasonable.
- You are in one of the higher tax brackets.
- Your refund will be proportionally larger.
- You do not have high-interest debt such as credit cards.
- Any extra cash is better used paying down the card.
- You can easily afford your current debt payments.
- If your debts are already stretching your thin, don’t add more.
- You are 100% committed to applying your tax refund to your loan.
- Receiving a large lump sum can be tempting to spend elsewhere…
- You have a higher than average tolerance for risk.
- If the investment you make with the loan proceeds decreases in value, you still owe the full amount of the loan.
From a hamster-wheel angle, there is absolutely nothing wrong with foregoing an RRSP loan and simply starting (or increasing) your RRSP contributions going forward. This way you are ahead on your retirement savings instead of behind. However, some people are more motivated to pay off a loan than they are to save. Using an RRSP loan is better than not saving for retirement at all, as long as most of the statements above apply.
If you are going to borrow for your RRSP, the best case scenario is an RRSP Gross Up Loan. Imagine that you already contribute $3000 annually into your RRSP, and that you take out a $2000 RRSP Loan for a total contribution of $5000. Assuming a 40% tax bracket, you will receive $2000 as an RRSP refund which fully covers the RRSP Loan.
Another version is the RRSP Top Up Loan. In this example you contribute $3000 to your RRSP already and borrow another $7000 for a total contribution of $10,000. Assuming a 40% tax bracket, your refund is $4000 which partially offsets the RRSP loan. You are still responsible for the remaining $3000.
Most major banks have RRSP Loan Calculators so Google yours. If you have an Advisor, they will be able to run your numbers for you.
Don’t forget that tax brackets are graduated. Depending on your income, your RRSP contribution could push you into a lower tax bracket meaning that you’ll receive a smaller tax break on some of the contribution. This tax chart can help you, but simply be prepared that your refund may not be as big as you think it should be.
RRSP loans are one tool to consider and may be right for you. There’s also nothing wrong with avoiding debt and saving in the good ol’ straightforward way of monthly RRSP contributions. You do you.
Interested in personal finance? Sign up for our newsletter here.