RRSP 201: How to Maximize Your RRSP Contribution Through an RRSP Loan?

Key Takeaways

• RRSP loans offer financial support for contributing to RRSPs.
• The flexibility in repayment terms makes RRSP loans adaptable to individual financial situations.
• Strategically using tax refunds to promptly repay the loan minimizes interest payments, achieving optimal financial benefits.

Everyone knows that the RRSP is a fantastic plan. Many individuals also aspire to fully leverage the tax incentives provided by the government. However, after calculating the desired contribution amount, some may suddenly realize that their accounts lack sufficient funds for the contribution. With the deadline fast approaching, what should one do? Don’t worry; this article will introduce a solution – utilizing an RRSP loan to easily secure the desired contribution amount.

What is an RRSP loan?

RRSP loans are also known as RRSP Line of Credit. You can borrow money to finance your RRSP contribution. They can help you address the pressing need when funds are a little tight.

What is the RRSP loan interest rate?

The interest rates for RRSP loans fluctuate based on the loan term and amount. Generally, short-term RRSP loan rates are around Prime + 1%, making them quite cost-effective. Here is the RRSP loan interest rate from iA Financial. You can also use its RRSP loan calculator to assess your repayment capacity. For the most favorable rates, it is advisable to apply as early as possible.

What is the repayment period for an RRSP loan?

Each financial institution may have different regulations, but generally speaking, there is usually no strict requirement for the shortest repayment term, while the longest term can extend up to ten years.

What are the benefits of RRSP loans?

The primary advantage of RRSP loans lies in immediate access to funds, helping you contribute the desired RRSP amount and, consequently, maximizing tax refunds. In RRSP 101, we understand that RRSP contributions and the investment growth within the RRSP account are tax-deferred. Taxes are incurred only when withdrawing from the RRSP account, based on the marginal tax rate for the withdrawal year. Therefore, by obtaining a loan to purchase $1,000 in RRSPs, assuming a marginal tax rate of 53.53%, you can save $535.30 in taxes in the contribution year.

Moreover, RRSP loans offer a high degree of repayment flexibility. Within the repayment period, you can repay partial or complete loan amounts at any time, avoiding additional interest payments. An effective strategy is to use any government tax refund received after RRSP purchase to promptly repay the loan, making loan repayment more manageable. For those with smaller loan amounts, the tax refund may be sufficient to clear the entire loan, requiring only minimal interest payments to enjoy the full benefits of RRSPs.

Additionally, RRSP loans provide the opportunity for your investments to appreciate over a more extended period. If your investment growth exceeds the loan interest, delaying RRSP contributions by a year results not only in potential lost tax refunds for that year but also in a year’s worth of foregone investment growth.

Example:

Assuming you are a resident of Ontario with the highest marginal tax rate of 53.53%, a capital gains tax rate of 26.77%, an annual investment return rate of 8%, and a loan interest rate of 4.70%, and you intend to borrow $1,000 for your RRSP contribution.

Through calculations, it is observed that after investing the loan in RRSP for one year, even after deducting the interest, the RRSP account balance is 214% higher compared to investing in a non-registered account.

How to apply for an RRSP loan?

If you believe that an RRSP loan can enhance your investment returns, you can prepare your application materials by following these steps:

1. Log in to the CRA My Account website to check your maximum RRSP contribution limit.
2. Confirm the amount you want to contribute.
3. Use an RRSP loan calculator to determine the required loan amount.
4. Contact your financial advisor to prepare the application. You may need to fill out a risk assessment form to confirm your risk tolerance.
5. Submit your application early. RRSP loans require time for approval, so don’t wait until the last minute to apply.

Once your application is approved, the next step is to choose suitable investments. In RRSP 104, you can learn how to select financial products based on your risk tolerance.

Tips: how to reduce your interest cost?

1. Submit your application as early as possible to get the best interest rate.
2. Pay off your loan as soon as possible. If you use your tax refund to pay off your loan, you can pay it back faster.

Through RRSP loans, you can fully leverage the government’s tax incentives, making it easier to fully contribute the desired amount. The flexible repayment terms and strategic use of tax refunds make this strategy more appealing. When choosing an RRSP loan, carefully weigh the pros and cons to ensure it aligns with your individual financial goals.

For more RRSP-related articles, please visit our RRSP Registered Retirement Savings Plan Guide.

Last Updated: February 7, 2024
Published Date: February 16, 2020

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