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Should I Consider A Personal Loan To Maximize My RRSP Contribution?

Janine Rogan

Feb 13, 2020 4 min read

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Should I Consider A Personal Loan To Maximize My RRSP Contribution?

We are now well into RRSP season, with the deadline of March 2nd right around the corner! This means you have until then to contribute to your RRSP and have it applied to your 2019 tax return.

If you haven’t done so already, you may want to run a quick calculation of how much tax you may owe to see if you need to boost your contributions for the year. You also may be asking yourself, “Should I consider a personal loan to maximize my RRSP contribution?” — but we’ll get into that a little later. First, let’s start with the basics! 

Should I consider a personal loan to maximize my RRSP contribution?

What is an RRSP?

An RRSP stands for a Registered Retirement Savings Plan. It is a type of investment and savings account for Canadians to help them save for retirement. The main benefit of an RRSP account, compared to a regular investment account, is the tax benefits it offers.

What does it mean to contribute to my RRSP?

Each year, any Canadian resident that is over the age of 18 and has earned income will see an increase in RRSP contribution room. This number can be found on your Notice of Assessment or on your CRA online account. Note that this amount can be reduced if you have an employer-sponsored plan that contributes to your retirement account as well.

How can I lower my tax bill using my RRSP?

When it comes to lowering your tax bill or increasing the amount refunded to you – RRSP contributions are a great option. RRSP contributions are most beneficial for those in higher tax brackets as the CRA uses your marginal tax rate to calculate the amount you will be entitled to on your return.

Should I consider using a personal loan to maximize my RRSP contribution? 

In certain circumstances, if you want to boost the amount you will receive as a refund, you may consider using a personal loan to maximize how much is funnelled into your RRSP. These RRSP loans are typically shorter term and are taken out right before that March 2nd deadline so that individuals can use their refund to help pay down the amount they owe.

For instance, if you had $10,000 of contribution room left and want to top up your account you could look to a low-interest loan. Once you’ve made the $10,000 contribution into your RRSP you would receive around $4,000 in cash back on your tax return.¹ Provided you could get around a 5.6% interest rate, a term of 5 years, and earn a 7% return on your investments within your RRSP, you would find yourself well ahead of the game. Especially if you use the refund you receive to pay down that personal loan, taking the balance down to $6,000.

On $6,000 you would be required to make payment of approximately $115 per month. You would end up paying $900 in interest on your $6,000 loan over the 5 year period it was outstanding. Within your RRSP, the $10,000 contribution you made could grow to $76,000 over 30 years.² If you’re still wondering, “should I consider a personal loan to maximize my RRSP contribution?” check out the final word. 

The final word

Taking out a personal loan may seem like a good financial decision when you stand to make that much cash, but it is important to make sure you aren’t in over your head. The balance you take out shouldn’t push you financially to the point of being uncomfortable.

If you don’t have steady employment or are already maxed out this may not be a wise financial decision. However, if you’re in a strong financial position, it may make sense to take out a personal loan to maximize your RRSP contribution.

¹ – This assumes that you are in combined tax bracket of 40% and that you had no other balance owing on your tax return.

² – Assumes 7% return

About the author: 

Janine Rogan is a CPA and personal finance writer from Calgary, Alberta. She is a passionate millennial sharing her wealth of financial knowledge with Canadians. Janine has run numerous workshops, spoken at dozens of conferences, and written over 600 articles relating to personal finance. Janine hopes to empower Canadians to take control of their finances and live a value based life. More articles by Janine can be found on her website.

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