It’s that time of year again, RRSP season is upon us which means someone somewhere will talk to you about taking out an RRSP loan. Likely it will be the 16 year-old bank teller who will try and set up an appointment with an investment advisor in the bank. We all know how beneficial RRSP’s are, but should you take out an RRSP loan this year?
You may have had good intentions all year, planning to save enough to put a serious dent in your RRSP contribution limit. However, every day bills along with credit card debt can syphon your disposable income to the point where you are not actually saving anything. This is where RRSP loans can come in handy, it’s like playing with house money except you have to pay it back with interest.
Here are some pros and cons that may help you decide whether or not you want to take out an RRSP loan this year:
- Immediate tax benefits – as with every RRSP contribution, you will see an increase on your next income tax return. So with no money up front you could realize an immediate tax benefit, the key is to use this tax return to pay down the RRSP loan.
- Low rates and good terms – interest rates for RRSP loans are typically low, lenders will often defer your first few payments until you get your tax refund as well.
- Forces you to save – those of us who find it difficult to save money on a regular basis, an RRSP loan allows you to take advantage of a great tax vehicle. Even if you have difficulty setting money aside, you are unlikely to miss an automatic loan payment.
- More debt – you will be taking on more debt, your loan will require regular monthly payments. You should consider your other monthly obligations and ensure you will not run into cash flow problems with your new savings plan. Also immediately applying your tax refund to the loan is highly recommended to reduce the amortization time.
- It costs money – although interest rates are favorable, you still have to pay for the privilege of borrowing money.
An RRSP loan may be debt, but it is considered “good debt” by the majority of investment advisors. It is an excellent strategy for people who find it difficult to put aside a lump sum to use every year, and for anyone who wants to top up their existing contributions.
You may have money owing, but you will have money growing inside an investment at the same time. If you are looking to take advantage of an RRSP loan strategy this year, we encourage you to give us a call today!
The information in this material is derived from various sources. Material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact us for benefit, pension and insurance advice based on your corporate or personal circumstances.