Let’s suppose you invest monthly into your RRSP, say $300 per month to total $3600 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 $2500 you will increase your contribution to $6100, when you file your tax return you will receive a refund of approximately $2440 (assuming a 40% tax bracket) and of course; you use this refund (plus $60) and pay off the loan in full. Essentially you have boosted your contribution by 69% with only an additional $60 out of your pocket. 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 intend to borrow, if you plan to pay off the loan within 1 year, I suggest a variable rate. For longer-term loans (5-10 years) normally I would suggest a fixed rate; but with interest rates expected to come down, variable may be the better choice this year. 

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

Is Proof of Assets or Proof of Income required? Credit-approved RSP loans $50,000 and under do not require Proof of Assets or Income. (B2B Bank Financial)

Are there penalties to pay it off early? It depends on the financial institution you get your loan from. This is an important feature, especially if you plan to use your tax refund to pay off the loan. 

Can I consolidate previous RRSP loans? Rates have changed; check to see if it would be advantageous to consolidate previous RRSP loans, if the new interest rate is lower it may be beneficial to consolidate your loans.

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. In the future you may not have the income to write off RRSP contributions against, minimizing any tax refund opportunity. 

Please note that this strategy may not be suitable for all investors and you should talk to your financial planner regarding your specific circumstances. If you would like more information or need help determining whether an RRSP loan makes sense for you, please don’t hesitate to contact us. 

The last day to make an RRSP contribution for the 2023 tax year is February 29th 2024.

Have a great weekend,

Tracey & Paige 

Sources:

https://b2bbank.com/en/rspcentre/inde

https://stories.td.com/ca/en/article/when-will-interest-rates-go-down-canada