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When to Borrow for Your RRSP

Consider borrowing when you haven't set anything aside for your RRSP in a given year, or when you haven't reached your annual contribution limit. In both situations, borrowing can make sense. That's because putting money in your RRSP may reduce your taxable income for the year at same time that it provides for your retirement. To determine whether you should borrow money for your RRSP in a given year, you should check if you are eligible for a tax refund and also compare the interest you're earning in your RRSP to the interest cost of borrowing (the former should outweigh the latter).

Key RRSP loan facts:

  • By borrowing to increase your RRSP contribution to the maximum, you will, in most cases, reduce the taxes you're required to pay.

  • The cost of borrowing is at historical low levels.

  • The money you borrow to invest will grow together with the rest of your RRSP investments – sheltered from tax and benefitting from the power of compounding.

The following two scenarios help illustrate when borrowing makes sense:



 

+ Borrowing to make an annual


Let's say you borrow $5,000 at 5% and pay it back over 12 months. Your total interest cost is $135.00 (assuming the loan is repaid in 12 equal monthly installments of $427.92 with interest calculated monthly on a declining balance).

Now, if you invest your $5,000 in an RRSP earning 6% compounded annually, the total interest earned is $300 in the first year. So you're ahead by $165.00.

Plus, by making an RRSP contribution, you may receive a tax refund. For example, if you're in a 35% marginal tax rate, you may receive a tax refund of $1,750 on a $5,000 contribution. With a refund you may want to pay down your loan quicker or you could even invest your refund in your RRSP for next years contribution.

 

+ Maximizing Your Contribution

If you've already put some money into your RRSP over the year but wonder how you can put enough in to reach your contribution limit, it may make sense to borrow to maximize your contribution and then use the tax refund on your total RRSP contribution to pay back the RRSP Loan.

For example, let's say your RRSP limit is $4,571 for the year, you have already contributed $3,200 and your tax rate is 30%. Therefore, you would need to borrow $1,371 to maximize your contribution. Next, divide $3,200 by 1 less your marginal tax rate. $3,200 / (1-30%) = $4,571

Your total contribution would be $4,571 based on borrowing $1,371, which is also what you'd receive from your tax refund ($4,571 X 30% tax rate).

In the end, you could use your refund to repay the loan in full!

Get Started

Your first step is to calculate how much you may need to retire comfortably. Then you can decide on the type of retirement products that are best for you.

Retirement Calculator


Read through the information and if you have any specific questions send us an email and we would be pleased to help.

 

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