While planning for retirement may not be your biggest priority right now, it’s always a smart decision to start preparing for your future, sooner rather than later.
Putting away money for your RRSP can be difficult, especially if you’re dealing with household bills, credit card debt, and other financial obligations. If you’re unsure you’ll be able to contribute to your RRSP this coming year, you can consider using an RRSP loan.
What Is An RRSP Loan?
An RRSP loan lets you borrow money to put towards your RRSP. It works much like any other standard loan, whereby you borrow a specific amount of money that you pay back — plus interest — over a certain time period.
The difference between regular loans and RRSP loans is that the funds borrowed go directly to your RRSP account, instead of being used for a wide range of other purposes, such as paying for home renovations or car repairs. Further, RRSP loans usually have shorter terms compared to conventional loans and may also come with lower interest rates.
Some Canadians apply for RRSP loans for the purpose of paying fewer taxes. That’s because contributions to your RRSPs will lower your taxable income, which means fewer taxes paid. You could then use any tax refund you receive the following tax year to pay down part of your RRSP loan.
If you’re in a higher tax bracket, offsetting the amount you pay in taxes through higher RRSP contributions from an RRSP loan could be a financially savvy move.
Where Can You Get A Loan To Contribute To Your RRSP?
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RRSP Loan: The Good
If used properly an RRSP loan can be a great financial tool that can help you achieve your retirement goals. Let’s take a look at the advantages that an RRSP loan can offer you.
You Will Pay Less Tax
An RRSP is one of the best tax-sheltered ways to save for retirement. Not only would an RRSP loan help you contribute to your RRSP, but any contribution you put towards it is deducted directly from your income. This can help you get into a lower tax bracket, which can lead to a higher tax return.
For example, if you earn $60,000 one year and you put away $10,000 into your RRSP, you’ll only be paying income tax on $50,000.
Enforced Savings
Borrowing money for your RRSP is an attractive option for those who lack the discipline to save on a regular basis. A lot of people struggle to set aside savings but when a loan payment has to be made, you will likely start making the necessary budget cuts to your lifestyle in order to make that payment on time.
Easy Terms, Low Rates
Let’s say you borrow $10,000 to contribute towards your RRSP, this will cost you about $270 in interest over the course of one year (at 5%). Even considering you can’t deduct the interest on loans for RRSP contributions; this is still very reasonable considering the tax benefits that come with it.
For example, if you earned $60,000 in Ontario, and contributed $8,000 to your RRSP, here’s how much you could expect to get back. In this basic example, it’s estimated that you’d get back $2,160 instead of owing $210.
| Income | $60,000 | $60,000 |
| Estimated Income Taxes Paid | $10,000 | $10,000 |
| Estimated CPP/EI Premiums Paid | $4,000 | $4,000 |
| RRSP Contribution | $0 | $8,000 |
| Tax Refund | ~(-$210) | ~$2,160 |
Add in the tax-deferred growth that comes with an RRSP along with the fact that banks often defer your first monthly payment until you get your tax refund and you’re looking at quite a smart investment.
Playing Catch-up
If you have difficulty saving enough money to put away for your RRSP then you most likely have unused contribution room in your account. Borrowing money allows you to fill up this contribution room while reaping the rewards of the tax benefits.
RRSP Loan: The Bad
While an RRSP loan can be a great option for many, it also may not be the best choice for your unique financial situation. Before making any decisions and before taking on any new debt, you need to weight both the pros and the cons.
It’s Another Form of Debt
An RRSP loan is just that, a loan. This means you’ll be taking on debt, adding another monthly payment into your budget and dealing with interest charges. If you feel as though your budget can handle this added stress, then an RRSP loan could be a good idea. If your finances are already strained, a new loan, even if there are tax benefits, could hurt your future instead of helping it.
For example, if you borrow $8,000 at 5% with a term of 24 months, you’ll be stuck with a monthly loan payment of about $351. Be sure to budget before taking on any additional debts.
| Loan Amount | Loan Term | Interest rate | Monthly Payment |
| $8,000 | 24 months | 5% | $350.97 |
It Will Still Cost You
For an RRSP loan to be valuable you need to be able to qualify for a loan with a low-interest rate. A high interest rate will negate any tax benefits. Furthermore, you should so be able to repay an RRSP loan within one year, any longer and again the interest you’ll be paying will negate the tax benefits.
In the table below, you can see how longer terms and higher interest rates can counteract the savings you get back as a tax return. For example, if your RRSP contributions lead to an extra tax return of $800, the true amount you get back would be the tax return minus the total interest you pay.
| Loan Amount | Loan Term | Interest rate | Monthly Payment | Total Interest Paid |
| $8,000 | 24 months | 5% | $350.97 | $423.28 |
| $8,000 | 12 months | 5% | $684.86 | $218.32 |
| $8,000 | 24 months | 15% | $387.89 | $1,309.36 |
| $8,000 | 12 months | 15% | $722.07 | $664.84 |
Be Wary Of The Type Of Investment You Make
In order to make this investment worthwhile, it is extremely important to adequately research the investment you’ll make in your RRSP. Remember, you’re borrowing to invest. You want to avoid making high-risk investments. If you do, you may ultimately end up owing more than the total value of your investment if it declines.
No Deducting The Interest
Capital borrowed for non-registered investment income tax is deductible; yet, interest on the loan for your RRSP is not. If you have the capital to invest, put it in your RRSP, then borrow for other investments so you will still reap the rewards of the tax deduction.
Requirements For An RRSP Loan
To qualify for an RRSP loan, you’ll need to meet the following criteria:
- Good credit. Lenders that offer RRSP loans typically require that you have decent credit to qualify. Generally speaking, a credit score of at least 660 is usually recommended. You can check out your credit score for free using Compare Hub.
- Steady and reliable income. You’ll need sufficient income to cover your loan payments until it’s paid off in full. Your lender will want to verify your income to make sure it’s strong enough.
- Manageable debt. Most consumers carry some level of debt, which is acceptable as long as the debt is not overwhelming. That said, the amount of debt you currently hold could impact the loan amount you qualify for.
What Types Of RRSP Loans Can You Get?
There are a handful of RRSP loan options available. The goal is to find one that will cost you the least in interest over the loan term:
- Secured RRSP loans – You can secure your RRSP loan by using an asset of value to back the loan. This will reduce the risk for the lender and make the loan easier to qualify for at a lower interest rate.
- Unsecured RRSP loans – Without collateral, your RRSP loan will be considered unsecured. Without an asset of value securing the loan, the risk for the lender increases, which can lead to higher interest rates. While these loans may be slightly more expensive, they carry less risk for you as there’s no collateral the lender can seize if you default on the loan.
- Peer-to-peer RRSP loans – These types of loans let you borrow money from private investors instead of traditional lenders. You can access peer-to-peer loans mainly online.
Bottom Line
Finding out whether borrowing for your RRSP is right for you can be tricky and will depend on multiple factors. At the end of the day, an RRSP loan can be a strong move for your portfolio but care should be taken when deciding whether you’re in the best position to make this kind of financial move.
