If you don’t have money to contribute to your RRSP, you may be tempted to take out a loan from your financial institution so you can contribute before the deadline. Is this the best option?
Popularized by many financial institutions, the RRSP loan consists of taking out a term loan and using that amount to contribute to your RRSP.
The tax refund obtained thanks to this deposit partially offsets the interest cost of this loan. The tax refund can also be used to pay off part of the balance on that loan, which is beneficial.
However, this isn’t a strategy that financial planner André Lacasse recommends to his clients, with a few exceptions.
Automatic transmission, better
André Lacasse points out that regular contributions through automatic transfers, for example every payment period, are by far the most profitable option.
Andre Lacasse
financial advisor
“This means you don’t have to pay interest on the RRSP loan and you also benefit from buying at average cost,” he explains. This means we counteract market volatility by contributing over multiple months rather than a single contribution. In fact, investment returns can change throughout the year due to stock market fluctuations. By contributing to your RRSP on a monthly basis, you reduce the impact of this factor because you’re then buying at an average cost, which can make all the difference in the long run.
In addition, regular automatic transfers allow you to accumulate a tidy sum at the end of the year without straining your budget or paying a few hundred euros in interest costs.
“Finance is a problem for most people and getting a loan is an added stress. And when we arrive in February, we panic because the deadline is getting dangerously close. None of my clients experience that kind of stress as they make regular monthly contributions,” he says.
But there are exceptions
However, there are exceptions that prove the rule.
If you’re considering buying a home and qualify for the Home Buyers’ Plan (HBP), an RRSP loan could be an attractive option if you’re short on cash.
Remember, the RAP is a program that allows you, under certain conditions, to withdraw a portion of your RRSP with no tax deductions to buy or build a home. The withdrawal limit is currently USD 35,000, after which it is repayable over 15 years.
In this regard, a person lacking financial resources could take out a temporary three-month loan to top up their RRSPs.
Please note: In order to be eligible for use under the RAP, the funds must have been deposited at least 90 days prior to withdrawal.
“At runtime, the borrower deducts the amount from their RRSPs and uses it to repay their loan. At the same time, he also benefits from a $35,000 contribution that reduces his taxable income and therefore his tax burden. He can benefit from a tax refund, which he will then use to pay his down payment to buy his property,” advises André Lacasse.
Another exception: the self-employed, who expect larger cash inflows in the weeks after the payment deadline for the registered pension scheme.
“A term loan will help bridge the gap. Once the amount is received, the self-employed person can then repay their RRSP loan,” says the financial planner.
In either case, an RRSP loan can be an attractive option.
A CONCRETE EXAMPLE
Your income is $65,000 and you contributed $2,000 to your RRSP this year.
If you borrow another $1,180 and add that to your original RRSP contribution for a total of $3,180, you could get a tax refund of approximately $1,140.
With this repayment, you can pay off almost all of your RRSP loan with no interest.
If the interest rate is 6.5% and the loan term is one year, the loan amount (principal and interest) is $1221.96 or monthly repayments of $101.83.
Attention : Whether fixed or variable, interest rates are currently relatively high (approx. 6.5 to 8% per year). Most financial institutions offer the option to defer the first payment after a grace period of three months or more. Interest begins to accrue from the loan date.
RRSP and TFSA: steadily increasing contributions
Quebecers’ average annual contribution to their Registered Retirement Savings Plan (RRSP) increased from $6,650 in 2017 to $8,880 in 2021.
That’s an annual premium increase of 32.33% over five years.
More than $10,000 in TFSA
Quebecers’ contributions to their Tax-Exempt Savings Account (TFSA) have also increased significantly annually over the past five years, including in the pandemic years of 2020 and 2021.
The average amount of their annual contributions has thus increased from USD 7,740 in 2017 to USD 10,220 in 2021, an increase of 32%.
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For 2021, we’re talking about a total of $40 billion in contributions to their RRSPs and TFSAs.
$16.5 billion in RRSPs in 2021, a 12.5% increase from $14.7 billion in RRSPs in 2020.
Similarly, $23.5 billion was deposited by Quebecers in a TFSA in 2021, a 20.05% increase compared to $19.63 billion in 2020.
AVERAGE RRSP CONTRIBUTIONS BY TAX YEAR
Quebec
2017 $6650
2018 $6850
2019 $7190
2020 $8080
2021 $8880
Source: Canada Revenue Agency
AVERAGE TFSA CONTRIBUTIONS BY TAX YEAR
Quebec
2017 $7740
2018 $8050
2019 $8440
2020 $9300
2021 $10,220
Source: Canada Revenue Agency
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