Maximize your RRSP contributions with an RRSP loan
Contributing to a registered retirement savings plan (RRSP) is one of the best ways to save for retirement. But many Canadians don’t have the cash flow to make the most of their RRSP contributions.
Taking an RRSP loan can help you maximize your annual contribution or catch up on unused RRSP contribution room. It means putting more money to work now in an effort to help grow your savings for the future.
Let’s say you make a regular lump sum RRSP contribution of $5,000 and expect your contribution will produce a tax refund. These three scenarios show how an RRSP loan can maximize your contributions:
Scenario one – Contribute what you’ve already planned
In this scenario, you would contribute each year without taking a loan – in this case, assuming a 39 percent marginal tax rate, a $5,000 contribution would create a tax refund of $1,919.
Scenario two – Accelerate your contribution
With an accelerated contribution, you take out a loan equal to the tax refund you’d receive in the first scenario and add it to your regular RRSP contribution of $5,000. In this example, you would contribute a total of $6,919 to your RRSP. This increases your contribution which then gives you a higher tax refund and increases your retirement savings.
When you receive your refund, you could use it to pay off the loan and still have some left to spend however you want. The direct cost to you is minimal – a few months of interest on the loan.
Scenario three – Maximize your contribution
This strategy creates the greatest opportunity for your RRSP growth. In this case, you’d borrow what you expect would be your tax refund from your total RRSP contribution plus the additional refund generated by the loan amount.
You’d then use your tax refund to repay the loan. Again, the direct cost to you would be few months of interest on the loan.
Choose the option right for you
An RRSP loan helps take your RRSP contributions to the next level at little cost to you – you can see the difference in value over 10, 20 and 30 years. Your financial security advisor has the expertise and planning tools available to help you make an informed decision about which option works best for you.