Borrowing to Make RRSP Contributions

Sunday, February 19, 2017 - 21:38

Asset Concerns, Government Debt


With the RRSP contribution deadline just around the corner (March 1), many people have either already made their contributions or they are procrastinating and waiting until the last minute to make their contribution. But there are also a number of other people who struggle this time of year as they are unsure if they should make a contribution and risk going further into debt. For those people who don’t have a lump sum of cash set aside for their contribution, should they forgo their contribution this year or should they borrow from the bank? This is always a popular debate at this time of the year.

Here are some pros and cons of borrowing money to contribute to your RRSP.

Pros

  1. Pay less tax! This is a main reason why people borrow money for their contribution. An RRSP is one of the best tax shelters available to Canadians as it allows your investment income to grow tax-free. 
  2. Interest rates for RRSP loans are low and the banks will often defer your first monthly payment until you get your tax refund.
  3. You are “forced” to make a loan payment. You aren’t forced to save money for your contribution. Therefore, if you have a problem with saving money for your contribution, this is a good way to make you do it.

Cons

  1. It’s another loan payment you will have to make throughout the year. If you’re already struggling financially, it might not be the best idea for you at this time. It doesn’t hurt to look into it though. The payments might not be as large as you think. It’s not worth getting into credit problems over it though.
  2. Interest rates may be low, but they aren’t free. It will cost you. Interest begins accumulating as soon as you take out the loan.

If you're hesitant about taking out an RRSP loan, talk to a financial advisor. First, figure out what you will be able to afford so that you don’t find yourself sliding into financial instability.