Me and My Money

Borrowing for RRSP contributions

Posted November 25, 2011
Originally Published February 22, 2011

Here’s how borrowing to contribute to your RRSP (in the biz world it’s called leveraging), is supposed to work. You take out a loan, make the contribution, get a tax deduction and, hopefully, a refund. You repay the loan, the investments grow and you live happily ever after.

It’s a great idea, on paper. In reality, I rarely see it work. People invariably fail to look at their own behavior. If you haven’t been able to make the RRSP contributions throughout the year, how are you going to pay back the loan?

I’m not ruling out borrowing for your RRSP contributions -- but only if you can say yes to these five IFs.

1. If you have a taxable income. You’d be shocked how often those with contribution room, but no taxable income, contemplate borrowing to deposit money in their RRSPS.

Obviously, the higher your marginal tax rate, the better the strategy looks. But don’t forget that interest on money borrowed to contribute to an RRSP is not tax deductible.

2. If you don’t have high interest, non-mortgage debt. It makes absolutely no sense to borrow money for a RRSP when you’re already paying high rates on credit card debt, (usually between 12 and 19 per cent), or on retail card balances (up to 29.9 per cent).

3. If you’re disciplined enough to take the tax refund and slap it on the loan.

4. If you can pay back the loan quickly. Most in the financial industry suggest aiming for a year, maximum, to discharge the debt, and I agree. By not paying it off within a year you risk making it a permanent part of your debt load.

5. If you can invest the money wisely. There’s nothing more disheartening than borrowing to contribute to your RRSP then seeing that money shrink by 20 or 30 per cent because of stock market losses.

SIDEBAR

If you can say yes to the five IFs, take a look at Credit Canada’s RRSP loan calculator to see how it might work out for you.

www.crediteducationweekcanada.com/calculators/rrsploan.html

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