RRSP Loan

So what is it – RRSP Loan? If someone would like to begin contributing into an RRSP but does not have enough money, it is possible to get a loan to begin contributing into a pension plan. This would be an RRSP loan. Interest on these loans is usually lower than on other types of loans and depends on Prime Rate. The formula for calculating interest on an RRSP loan is Prime Rate + 0.5%. You can always find the current Prime Rate at our homepage.

But before getting into this loan and investing money into an RRSP I would like to ask a commonly asked question.

What is good about this loan, it’s just another debt?

The answer to this question is: if a person would like to lower his or her taxable income but for whatever reason has no funds available to contribute into an RRSP, he can borrow the money as an RRSP loan and invest this amount into the pension plan RRSP. Using this way, you can lower your taxes. The income tax return you receive from contributing to RRSP can be used to cover part of the loan and the rest can be paid through the year. There are options to postpone your first payment for 90, 120 or even 180 days, which allows you to get your tax return, repay part of the RRSP loan and then make monthly payments towards the remaining amount.

Example:

Mister Smith has a job and makes between 50 and 75 thousands per year. He for some reason was not able to save money through the year to contribute to an RRSP. A new year came around and with it came the desire to invest $10,000 into an RRSP and lower the taxes but… there was no money. He can loan $10,000 and pay it off through the next year. On interest (let’s consider an interest of 4.45% – Prime plus 0.5%) Mr. Smith loses $242 through the whole year. Don’t forget that the $10,000 invested into an RRSP also brings additional income. For example: the interest at the beginning of 2019 is 2.5% on the regular savings account. If this rate continues through whole year you will earn $250, which is slightly more than the $242 paid in interest on the loan. This means that the costs associated with obtaining an RRSP loan will be returned in full.

The interest on the loan is not very important. It is more important to figure out whether there is a need for the RRSP, what is better in your specific situation, opening pension plan for yourself or spouse, for example. Of course, it is also really important to know whether you will be able to repay the loan through the year. Remember that the tax credit received for the contribution can be put towards loan payment during the year. In our example Mr. Smith will receive a credit of approximately $3,000 (30% of the contributed $10,000, which is the tax rate in the 50-75 thousand income bracket). If the credit of $3,000 is used to repay the loan, the annual interest cost for the loan will be much lower.

The RRSP loan is an open loan and available for prepayment at any time. Taking larger loans as well as for longer periods of time (2, 3, 5, or even 10 years) is also possible. There is one thing to keep in mind though – be realistic on your capabilities. One year loan (or longer period, if you chose) has to be paid off.

RRSP can also be used as a saving tool for the purchase of real estate. The program is called HBP (Home Buyers Plan). With this program you have the opportunity to save one third more than otherwise possible. However, it is important to analyze family’s current financial state. As a financial consultant, I am ready to offer you this service. Very often regular banks will not provide you with such financial analysis since, to a certain degree, bank service is impersonal. By the time you arrive the second time you will probably be talking to a different advisor.