RRSPs and Bank Loans

Saturday, January 5, 2019 - 21:18

Asset Concerns, Money Management


It’s that time of year again. It feels like it was just tax season, but alas, it’s arrived again. With tax season, come RRSP contributions. Some people set aside money throughout the year to contribute to their RRSP, and others tend to wait too long and when the RRSP deadline approaches (this year the deadline is March 1), they realize they haven’t saved anything to contribute. This is when many people decide to get a bank loan to use as a contribution.

So, if you don’t have a lump sum of cash set aside for your contribution, should you forgo your contribution this year or should you borrow from the bank? This is a popular debate at this time of the year.

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

Pros

  • 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. 
  • Interest rates for RRSP loans are low and the banks will often defer your first monthly payment until you get your tax refund.
  • 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

  • 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.
  • 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.

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