Let’s suppose you invest on a monthly basis into your RRSP, say $250 per month to total $3000 at the end of the year. If you have additional unused contribution room; you can boost your contribution with a short-term RRSP loan.

 

By borrowing $2000 you will gross up your contribution to $5000, when you file your tax return you will receive a $2000 refund (assuming a 40% tax bracket) and of course; you use this refund to pay off the loan in full. Essentially you have boosted your contribution by 67% without any additional savings on your part. This is an example of a “good debt” strategy.

 

Questions to Ask When Borrowing

How is the rate determined? The rate should be determined by the term you select, not by the amount being borrowed.

Should you pick a Fixed or Variable rate? This will depend on the length of time you intent to borrow, if you plan to pay off the loan within 1 year, I would suggest a variable rate. For longer term loans, (5-10 years) you may want to choose the fixed rate option.

Is there a minimum or maximum loan amount? Usually institutions will have a minimum of around $2500, and no maximum as long as you qualify.

Are there penalties to pay it off early? This is an important feature, especially if you plan to use your tax refund to pay off the loan.

Can I defer my first payment? Some institutions will allow up to 6 months before your first payment is due, this should allow you enough time to get your tax return done and apply your refund to the loan balance.

Can I consolidate previous RSP loans? Rates have changed; check to see if it would be advantageous to consolidate previous RSP loans that are locked in at a higher rate.

I am retiring this year; does this strategy still make sense? Absolutely, your final year of employment may be your last chance to get the maximum benefit from your RRSP contribution. Going forward you may not have the income to write off RRSP contributions against, minimizing any tax refund opportunity.

 

If you would like more information, or need help determining whether an RRSP loan makes sense for you, please don’t hesitate to contact me.

 

Have a great weekend,

 

Tracey

 

 

 

Disclaimer: Security Financial does not offer RRSP loans directly, investment loans are arranged though B2B Bank.

Source: Katherine Phillips, B2B Bank,MT 02-04-2015

Image courtesy of Stuart Miles at FreeDigitalPhotos.net