Contributing to your RRSP is key to building up your retirement savings. It’s not always easy, though. What if you want to make a contribution but you don’t have the money to spare?
Getting an RRSP line of credit or loan allows you to borrow the money you need to maximize your RRSP contribution. This comes with several key benefits:
- You reduce your taxable income, potentially putting you in a lower tax bracket
- You can take advantage of unused contribution room from previous years
- You could use your tax refund to repay the amount you borrow
- You benefit from more potential earnings from the funds in your RRSP
So, is borrowing right for you? Before you take advantage of this option, ask yourself these questions.
What’s your taxable income?
Generally speaking, making large contributions to your RRSP benefits you more when you’re in a higher tax bracket. When your taxable income is lower (less than $50,000), it can make more sense to contribute to a TFSA. Plus, if you don’t use your RRSP contribution room, it can carry over to years when your marginal tax rate may be higher.
Borrowing may be right for you if your taxable income is higher and you want to use up your contribution room. Plus, making a large contribution could lower your income and put you in a lower marginal tax bracket.
Should you choose an RRSP loan or an RRSP line of credit?
With an RRSP loan, you borrow a set amount that goes directly into your RRSP. You pay it back, with interest, within a set time frame.
With an RRSP line of credit you get access to a set amount of money and any money you borrow goes directly into your RRSP. You only pay interest on the amount you borrow and you can repay the amount at your own pace. This is the more popular option at Meridian because it’s flexible. Once you pay off the debt, the line of credit is still available to you for RRSP contributions in future years - there’s no need to re-apply.
Remember: If you are already managing a fair bit of debt, we recommend talking to an expert before taking on more. Our financial advisors are happy to help.
How long will it take you to repay what you borrow?
With an RRSP loan or line of credit, you pay interest on the amount you borrow in addition to repayment. The longer it takes you to repay the debt, the more interest you pay on it. The good news is that by contributing a higher amount before the RRSP deadline, you could get a bigger tax refund and use that to pay off all, or most, of what you’ve borrowed.
If you think it will take a long time to repay what you’ve borrowed (if you have other plans for your tax refund, for example), this may not be the best option for you.
Are interest rates high or low?
Borrowing money when interest rates are high can cost you more in the long run. Unlike your contribution, the interest on an RRSP loan or line of credit is not tax deductible. Take a look at the interest you’re earning on your RRSP savings and balance that against the interest you’ll pay on your loan or what you take out on a line of credit to decide if borrowing is worth it. Also, keep in mind that interest rates can change.
Still have questions? Ask an expert
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Learn more about RRSPs
A version of this article was originally published April 1, 2021