Borrowing to Invest in an RRSP
Need to start an RRSP or top up your contributions to an existing plan but don’t have the cash available? Consider getting an RRSP loan to build your nest egg today!
Your RRSP contribution is an important part of ensuring a secure financial future. While it may be preferable to use existing savings to contribute to an RRSP, it may be better to borrow than to not make a contribution at all. If you skip just one $5,000 contribution, you could reduce the value of your RRSP by almost $17,000 over 25 years, assuming a 5% average rate of return.
Putting off your RRSP contribution can impact your future cash flow and your retirement lifestyle. For starters, forgoing your RRSP contribution could reduce the tax refund you receive. It could also impede your ability to build a comfortable tax-sheltered retirement portfolio. Finally, it is more difficult to save thousands of extra dollars to top up your RRSP years down the road. Make regular RRSP contributions now and start getting the benefit of years more of investment growth.
Even if money is tight, borrowing to make an RRSP contribution may make good financial sense –pay down the loan as quickly as you can to maximize your benefit.
Keep in mind that interest on RRSP loans is not tax deductible. However, RRSPs have enough tax advantages to make carrying short term debt worthwhile. Not only will you receive an immediate tax deduction for your contribution, but your RRSP investment compounds on a tax-deferred basis for as long as it remains in the plan. In most cases the immediate tax savings, plus the tax deferred growth inside an RRSP, will far outweigh the short term interest costs of the loan.
In Addition, you can use any tax refund you get to help pay off your RRSP loan or to make an early RRSP contribution for the next tax year. However, it may be prudent to pay off higher interest-bearing debts, such as an outstanding credit card balance, before paying down your loan.