One way to maximize your RRSP contributions is to get an RRSP loan, but professionals in the industry warn this is not for everyone.
“It all depends on your tax rate, your expected rate of return and how fast you’re going to pay off the loan,” said Jamie Golombek, CIBC’s managing director of tax and estate planning.
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When you borrow to put money into an RRSP, the interest on the loan is not tax deductible, so it can become quite expensive, he said.
You may end up paying more interest to the loan than you’ll make on the RRSP, especially if it’s in a daily interest account or GIC.
“But if you have a higher rate of return (on the RRSP), then it may make some sense,” he said.
Kevin Cork, certified financial planner based in Calgary, says if you’re considering a loan to contribute, think about your saving style.
“For some people, getting an RRSP loan isn’t really the ideal system because there’s always going to be debt to the loan,” he said.
For others, who are better at paying down debt than saving, it’s a viable option. It’s all about carrots and sticks, he said.
“They need that stick of the fact that they owe this money,” he said.
If you decide to get a loan to contribute, Susan Howe, regional financial planning consultant with RBC, says go for a line of credit or apply for an RRSP loan, which is specifically designed for contributing to your RRSP and will likely have favourable interest rate terms.
Whichever way you decide to go, Howe said it’s imperative to ensure you have the means to carry the loan debt.
“The key is that you have to have the available cashflow to support those payments in view of whatever else might be going on in your financial picture,” she said.
Alim Dhanji, certified financial planner with Assante Financial Management in Vancouver, recommends anyone considering borrowing to contribute to their RRSP proceed with caution.
“If you can pay the loan back right away, then I am OK with it,” he said. “Otherwise, I generally don’t like people getting behind and always borrowing to catch up.”
Rather than paying off debt, Dhanji recommends setting up monthly contributions to an RRSP because it creates good habits.