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Should You Borrow to Make RRSP Contributions?

19 January 2013

It’s RRSP season and just the other day we brought you a list of the most commonly asked RRSP FAQs. But there’s one question that’s so common, and so complex to answer, that we thought we’d dedicate an entire post to it. That question is: should you borrow to make RRSP contributions? Sometimes the answer is a resounding “Yes!” especially if you haven’t hit your contribution limit this year. But to make sure that you’re doing the right thing, first make sure that these following five statements are true:

You have taxable income
RRSPs are used as tax shelters so that individuals can save themselves from being hit with high taxes around April. However, individuals are only hit with those high taxes if they are showing income that can be taxed anyway. If you have tons of contribution room left in your RRSP, but no taxable income, don’t worry about hitting that mark this year. You’re not going to be taxed anyway, and so you don’t need to rush about trying to take advantage of this tax shelter. And, the chances that any lender will loan you money when you have no income is also very small.

You have high-interest, non-mortgage debt
Saving for retirement just doesn’t make a whole lot of sense if you’re drowning in debt today. Mortgage debt is considered to be good debt, because you’re paying for something that one day is going to turn into a huge asset for you. And nobody should hold off on contributing to their RRSP for 25 years simply because they have a mortgage hanging over their head. But if you’re paying 12 per cent or more on consumer debt such as credit cards (considered very, very bad debt, by the way,) pay this off first. Once you’re free of those chains, you can start making contributions to your RRSP – and start borrowing again to make them, if necessary.

You know that you can use your tax refund to repay borrowed funds – and you will!
Borrowing money to make your RRSP contribution takes a great deal of willpower and discipline. It cannot be stressed enough that when you borrow to make RRSP contributions, you must use your tax refund to repay the loan. No, it’s not law or anything, but it’s the smart and right thing to do. Yes, something else will come up such as car repairs or unexpected bills. It doesn’t matter. Use your tax refund to repay your RRSP loan so that you can move on and forget about it.

You can pay back the loan quickly
If your’e going to be borrowing money to make an RRSP contribution, the general rule of thumb is that you pay it back within one year. It makes no sense to add to your debt load, especially for a long time, just so that you can save money in taxes.

You’re investing the money wisely and will see a good return
If your’e using your RRSP to invest and not just save, and you’re borrowing to help boost your investment, you must make sure that the investment strategy is a good one. Not sure about those risky stocks although they come with a high yield? Don’t borrow to add to your RRSP. Want to use your RRSP to invest in mortgages, but aren’t sure how just yet? Hold off another year on borrowing for your RRSP contribution until you know all the ins and outs of these types of hard money loans. Again, it makes no sense to borrow if your’e just going to end up taking a big loss on that loan.

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