Should you consider an RRSP loan this year? Or if you have lots of accumulated RRSP deduction limit should you consider an RRSP “Catch-up loan” instead of making monthly contributions?
You could give a big boost to your retirement plan by using other people’s money via an RRSP loan while getting help from the government with a big refund. It is ok to borrow in this case because you are doing so to acquire an asset. This would be considered a “good debt”. This is a widely used strategy nowadays also because it is currently somewhat inexpensive to borrow. It makes even more sense to borrow to invest when it is an RRSP. The extra advantage comes from the tax savings (or refund if enough was withheld at source). If you have a high interest debt, using the refund to pay off that debt would make this strategy even better.
A major concern is to ensure that you will feel comfortable with the payments for the duration of the term.
Here is how it works:
Let’s assume that you have RRSP deduction limit of $20,000 and you earn more than $50,000. You could maximize this room by doing an RRSP catch-up loan. You will save anywhere from 20% to 43% of your RRSP contribution or in this case about $6,000 in taxes! The refund depends of how much tax was withheld at source of course.
If you want to pay it off in lets say, 5 or 10 years, the monthly payments would approximately be $390 for a 5 year loan and $240 for a 10 year loan. If you apply the refund to the loan, it would be paid off earlier of course. You can pay the loan down or off entirely anytime without penalties.
If you are currently making monthly RRSP contributions you may want to stop or reduce them. I suggest that you first recalculate your retirement plan including this catch up contribution and make the ongoing contributions required to be on track with your retirement savings objective.
To summarize, using someone’s money make financial sense to give a boost to retirement savings, increase your net worth faster and reduce taxes! If you have a higher interest rate debt, this strategy is even better for you!
Investment loans are not for everyone and you should understand the risks prior to committing to this strategy. Ask us if this makes sense for you!
***Important Compliance Disclaimer***
An investor proposing to borrow for the purchase of securities should be aware that a purchase with borrowed monies involves greater risk than a purchase using cash resources only. The extent of that risk is a determination to be made by each purchaser and will vary depending on the circumstances of the purchaser and the securities purchased.
Discuss the risks associated with leveraged mutual fund purchased with an investment funds advisor before investing. Purchases are subject to suitability requirements. Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same if the value of the securities purchased declines.