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Should You Get an RRSP Loan to Maximize Your RRSP Contribution?

Written by Jessica Steer
If you’ve ever heard the expression that you have to “spend money to make money,” you’ll be familiar with the notion that an upfront cost delivers a significant return down the road. Let’s discuss whether contributing more to your RRSP with an RRSP loan is worth the upfront cost of borrowing money...
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    What is an RRSP Contribution?

    An RRSP Contribution is money you deposit into an RRSP account (registered retirement savings plan). This is an investment account that you hold in a financial institution. That money, also known as the contribution, is tax-deductible.

    How does my RRSP Contribution affect my taxes?

    In Canada, we are taxed on our income, both at the federal and provincial levels. If you've been reading up about RRSPs, you’ve been hearing a lot about the looming February 29 (for 2024) deadline, encouraging you to make your RRSP contributions to maximize your potential tax benefits in time for this year’s income tax filing.

    The taxes you owe are determined by the taxable income you have. That number can be significantly reduced by various deductions, and especially by your RRSP Contribution.

    Additionally, as this is an investment account, your money will most likely grow in value every year. However, this new money will also remain tax-free (until you withdraw it at retirement).

    When are RRSP Contributions due?

    The deadline for contributing to your RRSP for the 2023 tax year is February 29, 2024. Anything you contribute after this date will impact your tax return next year.

    How do I maximize my RRSP Contribution?

    Since you can only contribute a certain amount every year, first, find out how much that is. Start by checking last year’s Notice of Assessment, which you received last year from the Canada Revenue Agency (CRA). This includes unused contribution limits from past years. You can also get this information by logging into your CRA account.

    When you're ready, deposit whatever money you have managed to save throughout the last year, into your RRSP account.

    However, you may not have enough saved to make a significant contribution before the deadline.

    To maximize your contribution this year, an RRSP loan might be worth considering.

    Remember: If you already contribute to a pension plan (through work, perhaps), your maximum contribution will be reduced. This is known as PA-pension adjustment, and it’s on your T4 from your employer, in box 52, or in box 034 of your T4A from a different pension-type fund.

    How does an RRSP loan work?

    An RRSP loan works almost like a personal loan. But RRSP loans have specific advantages. Your amortization (length of the loan) is 6 to 12 months. Your interest rate is typically lower than other kinds of loans. You may even be able to defer your first monthly payment by a few months, so that you’re not out of pocket, while you wait for your potential income tax refund. Then, once you get your tax return, you can pay the loan back.

    How do I know if borrowing will deliver the best rate of return?

    There are several factors that will help you determine if an RRSP loan is worth it. Once you know what your contribution limit is, you’ll want to check out which tax brackets (and marginal rates) you fall into to calculate the difference:

    Then, calculate your deductions (there are many great ways to maximize your tax return deductions), such as your RRSP Contributions.

    What is the difference between how much tax you owe without the RRSP deduction, and how much less you owe with the RRSP deduction?

    In general, the higher your tax bracket, the more benefit you’d likely gain from borrowing to maximize your RRSP contribution. That’s mainly because your tax refund is likely to be smaller when your income is lower. If you can get a bigger refund that will cover a significant portion of the loan, there is a bigger advantage in getting a loan.

    Furthermore, your RRSP investments will continue to grow tax-free income, giving you long-term compounding interest that also boosts your long-term bottom line.

    Finally, if you’re good at paying your bills on time but struggling to put money into savings each and every month, using a reasonably priced RRSP loan will significantly advance your retirement goals by creating a savings habit, as you’ll be forced to make the monthly payments.

    In most cases, the interest paid on this loan won’t be tax-deductible, although if you have investments other than RRSPs, there may be a way that it can be done. If you don’t currently contribute to an RRSP (Registered Retirement Savings Plan), it’s not too late to benefit from the significant tax deduction, for the 2019 tax year.

    Other benefits of borrowing to maximize my RRSP Contributions

    In addition to some calculable benefits, your RRSP loan works as an effective retirement savings plan because the funds are deposited directly into the RRSP account, starting to grow for you right away.

    You can also deduct contributions made to a spouse’s RRSP, a great tactic if you are too old to contribute to your own RRSP, although be careful, as this reduces your own contribution limit.

    Remember: December 31 of the year you have your 71st birthday is the last day you may contribute to your own RRSP.

    Another advantage of an RRSP loan: You can repay part or all of the loan, without penalty, and without extra fees. The shorter the loan, the more cost-effective this option becomes.

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