Post A CommentIt’s hard to believe there is less than three weeks left to contribute to your RRSP. If you are one of those people who have been reading DoNotWait! and articles like the Top 10 Reasons to Save for Your Retirement then you know how important it is to make your contribution. That being said, maybe you don’t have the cash sitting there readily available to invest for the long-term. There is an alternative to missing the boat, again. Have you thought about borrowing to make your Registered Retirement Savings Plan (RRSP) contribution? Let’s look at what you’ll need to consider to determine if this solution is right for you.
Determine the Benefit vs. Cost
The first step is to consider the benefits versus the costs of borrowing. A person whose marginal tax rate is 45%, like the client I met yesterday, can surely see the benefit of recovering 45 cents on the dollar contributed even before his return on investment. On the flip side, if you are borrowing at the prime interest rate of 3% (which is all but guaranteed to climb starting this year) and you are in a lower tax bracket and plan to take several years to pay back the loan, maybe you should really do the math.
Look at Your Goals
Is your sole objective to recoup income tax paid or are you saving to buy your first home, returning to school or for retirement? Some people think that a Registered Retirement Savings Plan (RRSP) has limited functionality where the cash is only accessible at retirement. Actually, an RRSP is really flexible. First and foremost, its design is to help motivate folks to save for their retirement. Even so, the government has allowed you to meet other goals with this plan. You can withdraw tax deferred funds to go back to school for a business degree or to buy a first home, even after having benefited from the tax deduction upon contribution. In case you lose your job, you can withdraw from the RRSP and add the amount to your taxable income.
Repay Your Loan Quickly
No matter what your goals are, you need to be able to repay your loan quickly for this strategy to make sense. Especially in cases where you are borrowing lesser amounts, I recommend that you repay the loan within a year. Actually, the best strategy is to use the income tax refund generated by the contribution to repay a portion of the amount borrowed.
Start a Regular Savings Plan
What to do if a loan does not fit your strategy? Start a regular savings plan! Think about it, you were ready to make loan payments on a monthly or biweekly basis. Better than repaying a loan with a sizeable portion paying interest to your financial institution, put the entire amount into your RRSP account. You may miss out on an important income tax refund this year, but you’ll be on the train for every year thereafter.
So remember, when deciding how to borrow for an RRSP contribution, there are a few key consideration to take into account. Comparing the benefit versus the cost, reviewing your goals and finding a way to repaying the loan quickly are definite steps to helping yourself. And if borrowing doesn’t make sense in your situation, be sure to start a regular savings plan!
Author: Robert
