Is an RRSP loan a wise move?
The RRSP deadline for 2021 is now behind us and many Canadians are realizing that they will be paying more income taxes than they thought this year. On way to reduce your income taxes is by contributiong to your RRSP for next year however, there is one small problem most Canadians don’t have the money to do it. For many one of the solutions is to borrow to invest with an RRSP Loan, but is that a smart idea? While it may be a smart idea for some it could be precisely a wrong move for others…
Borrowing to invest in an RRSP is great for someone who has trouble saving money and it offers a form of a forced saving program, because it will encourage to use the tax refund to pay of the debt and continue paying it off for the rest of the year, instead of spending it. What many don’t realize though it that the refund is never as big as the contribution. And if there was any tax owing there might not be any refund at all. So you have to be honest with yourself and do the math to see if you will be able to pay off the loan by the time the next RRSP season comes around.
But if the reason you are in this situation is because you couldn’t withstand the temptation not to spend this year, why would paying off the loan be any easier than saving for the RRSP in the first place.
Is There an Alternative to an RRSP Loan?
Here is one alternative: Start a weekly or monthly RRSP PAC (pre-authorized contribution plan). For example if you were going to borrow $10,000 and were counting on a $4,000 tax refund, you would need to make a roughly $120 per week loan payments to pay off the loan in a year. Now instead of taking out that loan, use that $120 weekly as a RRSP PAC. This way by the time the next RRSP season comes, you will have made roughly $6,000 contribution to your RRSP which will give you $2,400 of tax refund which if used in conjunction with continued weekly deposits mean that you have made a $8,400 deposit in year 2, and $11,760 in year 3 and so on.
If you are unsure about an RRSP loan or other ways to reduce your income taxes please contact us at AWBFinancial for a free consultation.