If you have unused contribution room available and no other source of funds that could be used for your contribution before the March 1st deadline, you may want to consider an RRSP catch-up loan.
Are you retiring this year?
An RRSP loan can really make sense if you were in a high tax bracket in 2017 and will be in a much lower tax bracket this year or in future years. A perfect example of this would be if you are planning on retiring sometime this year. Borrowing to invest in your RRSP now will give you a much larger tax refund than in future years; this tax savings could outweigh the cost of any interest you will pay on the loan.
Already saving monthly?
Another idea, if you have been contributing to your RRSP on a monthly basis; say $300 per month for example, and have accumulated a contribution of $3600 for the year; a top up loan of $1500 could pay for itself. By taking a $1500 RRSP loan out now, your total contribution for the year will be $5100, if you are in a 30% tax bracket your refund will be approximately $1530 – enough to pay off the loan in its entirety (dependent on other deductions). Considering most institutions will allow you to defer your first loan payment for up to 180 days, you could get your taxes done and pay off your loan before the first loan payment is due.
What you should know
Unlike a traditional non-registered investment loan, the interest paid on an RRSP loan is not tax deductible. Furthermore, the rate of return you are hoping to achieve on the investment inside your RRSP, should be well above the non-deductible interest rate you will be paying on the loan for the strategy to make sense.
If you do take out a loan, you should plan to repay the loan back as quickly as possible to minimize the interest expense of the loan.
Furthermore, if you do have any funds or investments outside your RRSP, you may want to consider transferring those assets to your RRSP for your contribution before borrowing the necessary shortfall.
Borrowing to invest in your RRSP can make sense if you haven’t contributed enough throughout the year or want to catch up on unused contribution room. We at Security Financial Services have access to such loans and I would be happy to discuss your individual situation to determine if an RRSP loan makes sense within your overall financial plan.
Have a great weekend,
Tracey
Leverage Disclosure: 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 even if the value of the securities purchased declines.
Sources: Jamie Golombek.com, B2B Bank, Dynamic Funds, MT 01-25-17
Image courtesy of Stuart Miles at FreeDigitalPhotos.net