Is an RRSP loan right for you?

There are many reasons to contribute to your RRSP, but you might not have the money to do it. Should you borrow money to make your contribution? Maybe—depending on your situation and various factors.

Are you planning to buy your first home within the next few years? Maybe you already have, but the first few years as a new homeowner have limited your ability to make contributions? Or perhaps you’re close to retirement and want to maximize your savings without having to pay taxes?

In theory, an RRSP loan would be right for you if you don’t have the financial resources available to contribute. In practice, it’s a good idea to reduce the balance on your loan with the tax refund you’d get so you can pay it off sooner.

Before taking out a loan, here are 5 factors to consider:

1. Ability to repay: Look at all of your financial commitments. Don’t borrow more than you can repay. Keep your budget balanced and protect your ability to repay the loan.
2. Ability to borrow: An RRSP loan will increase your debt ratio, which is the percentage of your monthly income that goes to paying your debts. Lenders use this ratio to determine your eligibility for a loan. Before taking out an RRSP loan, think about your other potential financing needs.
3. Age: If you’re close to retirement, take out a short-term loan and pay it off as soon as possible. It’s always best to retire without extra financial commitments.
4. Discipline to save: are you a spender or a saver?
   If you’re more of a spender, an RRSP loan can be used as leverage to maximize your contributions, but you’ll need good support in planning how you’ll pay it back.
5. Leveraging: You borrow so you can buy more investments. You’ll have to pay off your loan and pay the required interest, even if the securities you bought drop in value.

Some advice

• Apply the tax savings from your contribution to your RRSP loan so you can pay it off sooner.
• Borrow an amount that you can pay back within one year. With this strategy, you can contribute annually.
• Consider automatic transfers if an RRSP loan isn’t right for you. By making a few adjustments to your budget, you’ll increase your payments and catch up on your contributions.
• To boost your retirement savings, compare RRSPs and TFSAs. One or the other will be better for you, depending on your situation.
• Talk to your advisor, who can help you decide what’s right for you.