Borrowing to invest in an RRSP
Making an RRSP contribution helps you save on taxes – you may even get a tax refund. But what if you don’t have enough money to make a contributionContribution Money that you put into a savings or investment plan.+ read full definition? Should you borrow? Here are some factors to consider before deciding.
4 factors to consider
1. Interest rates
What is the interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition on the loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition? Borrowing money when interest rates are high can be costly. Interest charges can add up, and offset the initial benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition of making the RRSPRRSP See Registered Retirement Savings Plan.+ read full definition contribution. Also, interest on money borrowed to contribute to an RRSP is not taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition-deductible.
2. Paying back the loan
Can you afford to make the loan payments on time and to pay the loan back quickly? If you can’t afford to pay the loan back within a year, it probably doesn’t make sense to add more to your overall debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition load. If you’re planning to use a tax refund to pay off the loan, you’ll need to be disciplined about applying the refund to the loan.
3. Your level of debt
Do you have other high-interest debt? If you’re already paying high interest on credit card debts, for example, your priority will likely be on paying down this debt as quickly as possible – and not taking on more debt.
If you don’t pay off the loan as scheduled, you may end up paying more in interest than what you get back in a tax refund. Also, the interest is not tax-deductible. Learn more about borrowing to invest.
4. Your taxable income
Do you have taxable incomeTaxable income The amount of income you have to pay tax on, after tax credits and deductions.+ read full definition? And if so, what tax bracketTax bracket The rate at which you pay tax, based on your income level.+ read full definition are you in? If you’re in a lower tax bracket, there may be no tax advantage to making an RRSP contribution even if you have the contribution room.
2 other strategies to consider
Instead of borrowing a large amount to make an RRSP contribution, you may want to use one of these strategies:
- Contribute what you would have paid to service the loan – For example, if you were going to borrow $20,000 and make a $350 monthly loan payment, contribute that $350 to your RRSP each month. You’ll pay no interest and you won’t be affected if interest rates rise.
- Take out a series of 1-year loans instead of 1 big loan – This may make sense if you have a lot of RRSP contribution room to catch up on and you’re not comfortable taking on a large amount of debt. With smaller loans, you’d pay less interest and carry less debt overall. And, you could use any RRSP refund to pay off your catch-up loan. Review your debt situation every year to make sure this approach is still working for you.
3 questions to ask
- Are interest rates low?
- Can you pay off the loan quickly?
- Do you have other high-interest debt?
If you’re thinking about borrowing to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition, read these tips before making your decision.