RRSP loans: When is it worth it?
When it comes to contributing to your RRSP time is money. The best approach is to have an automatic savings plan to make regular RRSP contributions all year. But if you have fallen behind and find the RRSP deadline is looming you might be thinking about taking an RRSP loan.
Is an RRSP loan right for you?
That depends on your circumstances.
Let's compare making monthly payments on a $2,000 RRSP loan versus putting the same monthly amount into your RRSP gradually over the term of the loan.
If you take a $2,000 RRSP loan, and assume a 3.25% over 12 months loan rate and a 3.25% annual rate on your RRSP investments:
- Your monthly loan payment would be approximately $170
- Your total loan interest would be approximately $35
- At the end of the 12 months, your $2,000 RRSP deposit would have grown to approximately $2,066
What if you invested $170 per month to the RRSP for 12 months instead of taking the loan? Your RRSP balance at the end of the 12 months would be approximately $2,071.
That's a difference of only $5. Not a big deal. But it could be larger, if loan rates are higher. On the other hand, if you took the RRSP loan, you could potentially get your RRSP tax deduction a year earlier - handy if you want to use it to repay debts, or invest it back into your RRSP.
When to take a loan vs make monthly RRSP deposits.
An RRSP loan may be more suitable if:
- You recently turned age 71 and want to top up your RRSP before the December 31st deadline to close or convert your RRSPs
- You expect your taxable income to fall into a lower tax bracket next year and want to top up your RRSP while you can save more tax with your RRSP deduction
- Your RRSP loan interest rate is low
- You can get a higher investment return by investing in one lump-sum in your RRSP, rather than investing gradually with smaller amounts throughout the year
- You plan to use your tax refund to repay a debt, or will contribute it to your RRSP
Monthly deposits may be more suitable if:
- Your employment is unstable
- Adding another loan to your plate might stress your budget
- You expect your income to rise, so you could get a larger tax deduction by deducting an RRSP contribution next year
Meet with a Vancity investment professional who can help you create a plan to catch up on unused RRSP contribution room.
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