Should I Get a Personal Loan to Maximize My RRSP Contributions?

By Remitbee - Feb 1, 2024

What is the Registered Retirement Savings Plan or RRSP?

The RRSP is a tax-advantaged retirement savings plan that allows the contributor to reduce their tax obligations. As such, contributions to the RRSP are tax deductible and income earned through it will be tax exempted as long as the funds remain in the plan. It is a tax-deferred account where the tax deductions are realized immediately on every contribution towards the savings, with taxes applied only on withdrawal.

Deadline for RRSP contributions for 2023 tax year and Contribution Limits in 2024

  • The deadline for RRSP contributions for the 2023 tax year is February 29, 2024.
  • The annual limit for contributions to an RRSP for 2024 is $31,560. However, this is not a hard limit; investors can contribute more, albeit with additional penalties.

Age Limit for Withdrawal from an RRSP

An RRSP account holder may withdraw their savings at any age. The sum then becomes taxable income for that given year. However, once the RRSP account holder turns 71, their RRSP balance must be liquidated or shifted to a Registered Retirement Income Fund (RRIF) or an annuity contract with an insurer.

What is an RRSP loan?

RRSP loans are loans taken for the specific purpose of contributing to an RRSP. They can be short-term or long-term loans with terms ranging from 12 months up to 10 years. RRSP loans make sense when your contributions have long-term growth potential, meaning that the growth in your RRSP is expected to exceed the interest you'll end up paying on the loan.

Should you consider RRSP loans to maximize RRSP contributions?

With the deadline of February 29 fast approaching, it is imperative to make your RRSP contributions so they can apply to the 2023 tax year. While falling short of your RRSP contributions can be a setback, the market has many RRSP loan options that loan you the contribution amount at reasonable rates and amortization. Ideally, the tax deductions gained through RRSP contributions can help repay the loaned amount with interest.

The advantages of using RRSP loans to supplement your contributions are as follows:

  • Maximizing Contribution Limits: Personal loans can provide a quick cash injection, allowing you to contribute the maximum allowable amount to your RRSP. This can be especially beneficial if you have unused contribution room and want to take advantage of tax-sheltered growth within the RRSP.

  • Tax-Deferred Savings: As stated earlier, contributions to an RRSP are tax-deferred. Using a personal loan to make a lump-sum contribution may result in a larger tax deduction in the long run, as any income earned through your RRSP investments is tax-deferred until withdrawn from the plan.

Risks associated with RRSP loans

Like all loans, RRSP loans also carry their own risks associated with the individual's ability to repay the amount with interest.

  • Debt Repayment: Taking out a personal loan means you'll need to repay the borrowed amount with interest. Failing to repay the loan on time can lead to financial strain and negatively impact your credit score.

  • Market Risks: If you invest the loaned funds in the market, there is a risk of market fluctuations affecting the value of your investments. You may not earn enough to cover the loan interest and repayments if the market performs poorly.

  • Interest Costs: RRSP loans can be risky if the cost of borrowing outweighs the potential investment returns. It's crucial to compare the interest rate on the loan with the expected return on your RRSP investments.

Conclusion

Borrowing to invest involves a level of risk that may not be suitable for everyone. It is essential to consider your risk tolerance, financial goals, and overall financial health when taking on any debt, including RRSP loans for investment purposes.