With this year's registered retirement savings plan contribution deadline almost upon us – it's Feb. 29, by the way – those with contribution room but no available funds might consider an RRSP loan.
According to an Edward Jones poll from last July, 34 per cent of Canadians say their biggest retirement fear is having to work longer to supplement their savings, up from 28 per cent four years ago. So making full use of an RRSP seems worthwhile, and an RRSP loan can help.
While it is first and foremost a loan – of course it will need to be paid back, and the sooner the better – it does have some things going for it, particularly given today's low interest rates.
"In this low-interest-rate environment, it makes sense, but you have to look at how you're investing the money, as well," says Dean Colling, first vice-president and portfolio manager for CIBC Wood Gundy, in Toronto. "It needs to be conservative ... so that you're not putting a borrowed asset into something that's high risk."
Indeed, given that an RRSP is designed to help save for retirement, it shouldn't be viewed as just another investment account, says Patrick French, director of retirement and financial planning for Edward Jones in Toronto.
One of the mistakes investors make is taking out an RRSP loan and putting it into a single stock, a so-called "can't miss" opportunity. It's a foolhardy strategy, Mr. French says.
"Any loss is a bad loss; any loss in your RRSP is compounded," he says, noting that you cannot get a tax deduction on the capitol loss.
Investors in a low tax bracket probably won't benefit much by taking on the extra debt, Mr. Colling says.
But for those paying a higher marginal rate, an RRSP loan may help maximize the tax deduction. They can contribute the funds, get the tax deduction, apply the tax refund against the loan and pay down the rest over the relatively short time frames that are usually the condition of RRSP loans. Some lenders will defer the first payment on the loan until the refund comes through.
But paying down the loan is the key here. "Ensure that the total returns you're going to get on the investment are greater than the borrowing costs," says Ahmad Dajani, vice-president of retail deposits at the Bank of Nova Scotia in Toronto.
Another benefit of an RRSP loan is that if you take the loan at the start of the year and put it into your RRSP as a lump sum, your money starts growing right away, faster than if you contributed at other times during the year. In addition, for people who struggle to make regular contributions, an RRSP loan can basically force them to save for retirement.
"It almost flips it on its head, if you have a tough time saving $100 a month," Mr. Colling says. "This is now a real forced savings because it is in fact a loan," and the borrower must make payments.
Making another payment on a regular basis might be painful for some, however, and while interest rates are low, the loan is not free.
"If interest rates were 5, 6, 7 per cent or more, I would be less inclined [to consider an RRSP loan]," says Geoff MacPherson, a financial adviser with Edward Jones in Newmarket, Ont.
On top of that, debt is debt. If a client is having trouble paying off existing debts, is strained for cash or has a significant amount of high-interest-rate debt, adding an RRSP loan is probably not the best course of action, says Mr. French.
And doing it just to get a payout at tax time isn't a good idea, either, he says. "Doing it to simply get a larger tax refund based on your deduction is not a good reason to do it. If it's being done in the context as part of your financial strategy then it may make sense."
Over all, the experts stress using an RRSP loan to make a solid investment.
"I would categorically say that RRSPs are no place for major-league risk taking," says Mr. Colling. "The biggest asset that all of us have with that vehicle is time and the magic of compounding, and so slow and steady is the way to go, rather than serious risk-taking."