Borrow money to contribute to an RRSP

The deadline for contributing to an RRSP this year is fast approaching — it’s March 1st.

Most of us know that the tax shelter gives Canadians the opportunity to save for the future on a tax-deferred basis, but what if you don’t have the cash on hand to a contribution?

One option is to borrow money to make a contribution and then use the refund you get when you file your taxes to pay off the loan.

It may work for some people, but not for all, and it should be done with caution, says Dan Hallett, vice president, research, at Highview Financial Group.

“As long as the loan is short-term and they don’t accrue the loan,” he says.

Characteristics of RRSP contributors in 2019

27,171,990

Number of declarants.

5,912,000

Total RRSP contributors.

24%

Percentage of RRSP contributors aged 35-44.

23%

Percentage of RRSP contributors with total income between $40,000 and $59,999.

$66,430

Median employment income of RRSP contributors.

$44.3 billion

Total RRSP contributions.

$3,260

Median RRSP contributions.

Source: Statistics Canada

Often people take out a loan, expecting to get a repayment large enough to pay off all or most of the loan very quickly, Hallett says. “If there’s anything left, hopefully they can get rid of it in a few months after that.”

This is not an ideal scenario and only works if you can borrow money at a low interest rate – such as through a home equity loan – and if the loan is repaid quickly.

A better solution is to have contributions on “autopilot” each month, says Hallett. The risk is lower and it will avoid the worry and stress of collecting money at the last minute.

Jason Heath, managing director of Objective Financial Partners, says if money is borrowed to make an RRSP contribution, it could generate a tax refund to pay off part of the loan, but there will usually be loan repayments continue afterwards.

He suggests a better option might be to skip this year’s lump sum contribution and set up an automatic monthly contribution plan instead. “You can always start making regular monthly contributions to your RRSP now to get a head start on next year without having to go into debt.

However, one situation where an RRSP loan might make sense is if your income is significantly higher for the current tax year than it normally is. If so, Heath says, a loan might be a good idea to avoid missing a large repayment.

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