Planning for retirement is an important step in securing your future, and the earlier you start the better. One helpful tool to save for the future is the Registered Retirement Savings Plan (RRSP), which is an investment account designed to help you save for retirement.
To help take full advantage of your RRSP tax benefits, you may want to consider an RRSP loan. It can help you make a larger contribution to your RRSP, thereby lowering your taxable income and maximizing your retirement savings.
Key Points
- An RRSP loan lets you borrow money to boost your RRSP contribution.
- RRSP loans may be suitable if you want to make a significant RRSP contribution but don’t have the funds readily available.
- As helpful as RRSP loans may be for some, they may not be suitable for those who already have high-interest debt or who don’t have the income needed to repay the loan quickly.
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.
What’s The Difference Between An RRSP Loan And A Personal Loan?
The main difference between regular loans and RRSP loans comes down to the loan’s purpose. More specifically, the funds borrowed from an RRSP loan go directly to your RRSP account. In contrast, the funds from a personal loan can be used for a variety of 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 or promotional interest rates. While you can use a conventional loan for RRSP contributions, it’s usually less competitive.
Borrow Up To $50,000
Can I Use An RRSP Loan To Reduce My Taxable Income?
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 and have substantial contribution room, offsetting the amount you pay in taxes through higher RRSP contributions from an RRSP loan could be a financially savvy move.
If you’re in a higher tax bracket and have substantial contribution room, offsetting the amount you pay in taxes through higher RRSP contributions from an RRSP loan could be a financially savvy move.
How Does An RRSP Loan Work?
An RRSP loan works as follows:
Step 1: Apply For The RRSP Loan
You can apply for an RRSP loan with your financial institution. The amount you’re able to borrow depends on factors such as your income, credit score, income, and the lender.
Step 2: Make A Contribution To Your RRSP
Once the RRSP loan funds are available, they will be deposited directly into your RRSP account. This boosts the amount you contribute.
Step 3: Claim Your Tax Deduction
After making an RRSP contribution, you can claim a tax deduction for that amount when you file your income tax return. This will lower your taxable income and thus increase your tax refund, all else being equal.
Step 4: Pay Back The Loan
You’ll have to repay the loan, which consists of interest and the principal balance. Just like any other type of loan, it’s important that you make on-time payments to protect your credit health.
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’ll 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 $8,000 into your RRSP, you’ll only be paying income tax on $52,000. This could move you down into a lower tax bracket, which may result in a bigger tax refund.
Let’s illustrate using an example, assuming you live in Ontario
| Income | $60,000 | $60,000 |
| Total Taxes Paid (Federal, Provincial, CPP and EI premiums) | $13,441 | $13,441 |
| RRSP Contribution | $0 | $8,000 |
| Estimated Refund | $0 | $2,128 |
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.
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’ll likely start making the necessary budget cuts to your lifestyle in order to make that payment on time.
Flexible Terms
RRSP loans often come with flexible loan terms. For instance, you could borrow money for the RRSP contribution with a repayment term anywhere from 12 months to 5 years, depending on the lender. With such flexibility, you can choose the loan term that suits your financial needs best.
Lower Rates
Generally speaking, RRSP loans come with interest rates that are lower than regular loans. You can often get an interest rate on an RRSP loan that’s at or near prime with a good credit score.
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, consider the drawbacks as well.
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 to 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 immediate tax benefits, could hurt your future instead of helping it.
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 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.
| 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 |
Refunds Aren’t Guaranteed
The goal of an RRSP loan may be to get a bigger tax refund, but there’s no guarantee that you’ll get the amount you want. Tax refunds are based on several factors in addition to your income, including deductions and credits. Even if you’re in a higher income tax bracket, you may have other deductions or sources of income that can offset any RRSP contributions. In this case, your tax refund could be less than you expected.
No Deducting The Interest
Borrowed money used for non-registered investments is tax-deductible. However, 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.
However, if you fail to repay the loan, the lender can seize the asset used as collateral. This adds risk, so be sure you’re comfortable with the repayment terms before securing the loan.
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.
Learn more: Unsecured Loans Canada
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.
Where Can You Get A Loan To Contribute To Your RRSP?
Filters
- Amount
- Up to $35,000
- Rate
- 9.99% – 35%
- Term
- 9 – 78 Months
- Amount
- Up to $60,000
- Rate
- 19.99% – 34.99%
- Term
- 6 – 120 months
- Amount
- $500 – $10,000
- Rate
- 12.99% – 34.99%
- Term
- 9 – 60 months
- Amount
- Up to $10,000
- Rate
- Varies by product
- Term
- Varies by product
Should You Take Out An RRSP Loan?
An RRSP loan may be a good idea for some Canadians, but not so much for others. Consider the following before applying:
When Is An RRSP Loan Right for You?
An RRSP loan may be ideal if …
- You’re In A High Income Tax Bracket: If you’re in a higher tax bracket, the tax deduction from RRSP contributions may lead to a bigger tax refund. You can then use these funds to help you repay your RRSP loan more quickly.
- You’re Getting A Tax Refund: If you’re certain that you’ll be receiving a large refund, an RRSP loan may be a great way to give your retirement savings efforts a boost.
- You Have A Strong Income: If you’re able to comfortably cover the loan payments, then considering an RRSP loan may be worthwhile.
When Is An RRSP Loan Not Right For You?
An RRSP loan may not be best if …
- Your Finances Are Unstable: If you don’t have a reliable income or you’re unable to cover your loan repayments, then it may not be wise to apply for another loan.
- You Won’t Be Able To Repay Your Loan Quickly: If you don’t think you can pay off the loan within a year or so, the interest expenses could end up costing you more than you expect, which could make the loan less and less affordable over time.
- Your RRSP Refund May Not Be Enough To Cover The Loan: If you don’t know whether the refund you get will be enough to repay the loan, you may want to think twice about applying for an RRSP loan. Instead, you may want to consider saving up for RRSP contributions over time rather than borrowing the money to contribute.
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.
