Recently updated on October 25th, 2022 at 11:01 am
The season for RRSP starts in February and Canadians should go to the bank to make their RRSP contribution before the first of March. If you don’t have enough cash for that, it can be tempting to request a loan in order to make this contribution.
Should you do that? On one hand, it will increase your savings in the retirement fund and boost your chances of getting a tax refund. On the other hand, there are some downsides to this option. Keep on reading to learn more about the RRSP loan and whether you should use it.
The Basics of RRSP Loan
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The Registered Retirement Savings Plan (RRSP) is a strong tax-sheltered investment account that is available to Canadian residents. Making contributions to it can help you increase your retirement security and use the power of this plan to your advantage. If your personal finances are tight, here is what you may do.
Getting an RRSP loan can be a great tool to lower the income tax bill and boost your retirement savings straight away. People who have higher wages may benefit from this option if they wish to lower their income tax bills.
In reality, many consumers have had certain monetary obligations for the past year. As a result, they don’t have enough funds left to invest or save, so they can’t make a direct RRSP contribution.
Does It Make Sense to Borrow to Invest?
Getting extra money for this purpose by using an RRSP loan has become popular these days. If you borrow money to make this contribution, then you can claim it once you file your income taxes to get a refund. This tax refund will later be utilized to repay the RRSP loan. You won’t have enough cash to pay down the whole debt but your investment will already start increasing.
Both traditional banks and alternative lenders started promoting RRSP loans this year. This lending option is beneficial for the banks as they obtain the investment together with the loan.
Online crediting companies have also started these offers. If you have ever experienced a cash need, you may have taken out no refusal loans Canada. Alternative lenders usually have more flexible repayment terms and easier applications.
The interest rates on RRSP loans can be obtained at the prime rate, while the client has a chance to repay the debt for 9 to 12 months. The monthly parts or installments make the repayment schedule much more flexible and affordable. The majority of RRSP loans are utilized to make a contribution to your RRSP before the deadline. The purpose is to maximize these contributions and save money on taxes.
Is an RRSP Loan a Good Idea?
You should think twice before you opt for any borrowing option. Any form of debt should be repaid on time if you want to avoid penalties and further financial disruptions. Consumers should evaluate the pros and cons of this decision before they make it.
Keep in mind that both brick-and-mortar financial institutions and online lenders have promotional campaigns to persuade clients that taking out this loan is a great idea.
However, it’s not that harmless, and here is what you should take into account.
The Pros of an RRSP Loan
- Lower your income tax bill
- Help you make your RRSP contribution if you don’t have enough cash for that
- Have a low-interest rate
- Lets you make an investment in a lump sum at the beginning of the year rather than smaller contributions during the year
Cons of an RRSP Loan
- If your income is lower than $100,000 or you have low marginal tax rates, it won’t be useful
- A form of debt that should be repaid within 9 to 12 months
What Is the Maximum You May Borrow?
If you decide to obtain this loan in spite of the advantages and downsides, you will be able to qualify for a maximum of $50,000. This amount is larger than the yearly maximum RRSP contribution.
High-income earners and people with a decent salary can benefit the most as this sum will be enough for them to catch up on their previous contributions. Some factors define the exact amount you may be offered by the local bank or an alternative lender.
Generally, the creditors will check your credit rating, credit history, and income before they decide. The majority of consumers obtain an RRSP loan for $5,000 to $20,000.
Can You Use This Loan for a House Downpayment?
This is a great question as getting an RRSP loan may also help you build your down payment fund and become a proud house owner faster. According to the First Time Home Buyer’s Plan, a client may obtain up to $35,000 for the RRSP. Of course, it means you need to have enough funds in your RRSP before you can borrow some cash from it and use it as a downpayment.
This loan may become a suitable option for funding the downpayment quickly under the HBP. Every applicant should understand the risks of taking out this loan as it’s your debt and your responsibility. It will come up in the mortgage applications of the borrower and add debt to the applicant’s balance sheet.
It should be taken into consideration before you request an RRSP loan. Ensure you have enough financial means to pay the debt off so that your credit history remains good enough to qualify for a mortgage.
The Bottom Line
To sum up, taking out an RRSP loan may be a useful tactic but it’s worth it only for high-income earners. It is used for making an RRSP contribution before the deadline to maximize it and save money on taxes. While the interest rates are low and the repayment term is long enough with equal monthly payments, there are some downsides too.
The more taxes you pay and the higher your income, the better this lending tool will work for you. In case your marginal tax rate is less than 30% and your annual income is below $100,000, requesting an RRSP loan won’t benefit you a lot.