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Money bag. (Alex Slobodkin/iStockphoto)
Money bag. (Alex Slobodkin/iStockphoto)

RRSP Season

When does it make sense to borrow for an RRSP contribution? Add to ...

Question:

Assuming one has no other debt, when would it be considered advisable to borrow money to contribute to an RRSP? Thanks, Leanne.

Answer:

Borrowing to invest in an RRSP can be very attractive, given current low interest rates. However, making that decision should not be based solely on looking at the effect it will have on your current tax return.

Instead, ask yourself why you are making the investment – is it solely for an immediate tax deduction or is your goal to save for retirement?

We all have competing demands on our income. If you were unable to make RRSP contributions during the past year, how confident are you that you’ll be able to pay back an RRSP loan this year? If you borrow funds to invest, the loan interest would be tax-deductible. However, interest on borrowed funds invested in an RRSP is not tax deductible.

Something else to consider is the pitfall of falling into a continuous cycle of borrowing to invest in RRSPs. If your available cash flow is used to pay down last year’s RRSP debt, do you have additional income to fund your current year’s RRSP contribution? If not, you may need to borrow again for next year’s RRSP contribution. Since you typically have to invest the funds at the same institution where you got the loan, you may also be reducing the investment options available to you.

For these reasons, it is necessary to review long-term retirement strategies, and not focus entirely on this year’s tax return. Instead of getting a loan, could you meet your objectives by starting a monthly deposit? Borrowing has some inherent risks. You are never sure about the level of future interest rates, and unexpected changes to your own circumstances may impact your ability to repay it.

On the upside, if you find it difficult to make regular contributions to your retirement account, having an RRSP loan can act as a type of forced savings – it’s easier to stop monthly payments to your RRSP than it is to stop loan payments.

If you can repay the RRSP loan and make RRSP contributions for next year, the strategy of borrowing-to-invest may work. However, in most cases, I suggest that it is more prudent to start a monthly RRSP deposit in an amount that you can sustain without a loan, and which will meet your long-term objectives.

Clay Gillespie, a certified financial planner and chartered investment manager, is a financial adviser and managing director at Rogers Group Financial in Vancouver. The views expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no representations as to their completeness or accuracy.

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