Budget for RSPs instead of borrowing
Easier to manage over long term
TORONTO — With the RRSP deadline looming, Canadians may consider turning to a loan to help them with a contribution.
But experts say caution is the best approach when borrowing money to invest for retirement.
“The easy out, when you didn’t set up a monthly plan to save for an RRSP, is to do it with a loan,” said John Kelleway, a director at wealth management firm HollisWealth.
“I wouldn’t encourage it over the long term because you’re paying interest charges on the borrowed utilities. It can easily become a habit every year.”
Financial experts say stress over RRSP contributions can be avoided if they are made in small amounts budgeted throughout the year and not attempted in one lump sum before the March 3 deadline.
A survey released Thursday by CIBC found that while 56 per cent of Canadians recently polled say they plan on making a contribution to their RRSP or Tax-Free Savings Account (TFSA) this year, nearly two thirds of those potential contributors (64 per cent) admitted that they don’t have the money.
Meanwhile, 31 per cent of respondents said they put away money automatically in their RRSP through the year.
There are number of benefits to contributing to an RRSP, with one of the mains reasons being a bigger tax refund. For instance, if someone earns $50,000 a year, contributing $5,000 would drop their taxable income to $45,000.
RRSP contributions should be a priority for those who have incomes of $100,000 or more, are selfemployed, or do not have a defined benefit or defined contribution pension plan through an employer, according to the experts.
It may also make sense to take out a loan for a contribution if someone gets an unexpected bonus at work one year, and it propels them into a higher tax bracket.
But for those in the lowest income bracket — under $43,953, according to the Canada Revenue Agency — there is no tax advantage in making an RRSP contribution, even if they have the contribution room.
Kelleway said it’s important to remember that the bank collects interest on a loan so the tax refund, or savings, should be used to repay it as quickly as possible, ideally within a year.