Borrowing for your RRSP: Four factors to consider
Contributing the maximum to an RRSP can be a challenge for many people, especially if unexpected expenses arise during the year. One effective strategy could be to catch up on unused contribution room with an RRSP loan.
“There’s no magic formula for building a comfortable retirement nest egg. You have to assess your future needs, set realistic, attainable savings goals and start saving as soon as possible. More often than not, however, reaching your financial goals for retirement means maximizing your RRSP contribution. While a systematic savings plan should be your first choice, there can be many tax and financial advantages to taking out an RRSP loan,” explained Daniel Laverdière, Senior Manager, National Bank Financial Planning.
Investors who are thinking of borrowing for their RRSP should first take stock of their situation and decide whether this solution is right for them. Here are the four main factors to consider:
1. Do your homework
Ask your financial advisor to calculate how much you can expect to earn on your investment and compare it with the interest rate you would be paying on your RRSP loan. If the anticipated return is higher than the cost of borrowing, a loan could well be worthwhile. If not, then you will be losing more than you stand to gain. You are then better off investing little by little in an RRSP by opening a systematic savings plan and re-investing your tax refund.
2. Stay within your budget
Paying back an RRSP loan should not strain your budget or your financial situation. It is essential to have some money set aside in case of emergencies. Opt for a short term on your RRSP loan and use your tax refund to repay all or part of your loan.
3. Calculate the risk
Making a large investment in the financial markets all at once could be risky if the markets tumble soon after. However, investing gradually through systematic savings mitigates risk, making it the most attractive solution. An RRSP line of credit could also be a good way of investing larger sums from time to time. Your tax refund could then be used to pay down your line of credit.
4. Maximize the tax advantages
It might not be to your advantage to claim your total contribution as a deduction in the same taxation year. If you plan to take out an RRSP loan to catch up on a large amount of unused room, you might be better off spreading the deduction over more than one year in order to maximize your tax refunds.
About the National Bank of Canada
National Bank of Canada is an integrated group which provides comprehensive financial services to consumers, small and medium-sized enterprises and large corporations in its core market, while offering specialized services to its clients elsewhere in the world. The National Bank offers a full array of banking services, including retail, corporate and investment banking. It is an active player on international capital markets and, through its subsidiaries, is involved in securities brokerage, insurance and wealth management as well as mutual fund and retirement plan management. The National Bank has assets close to $89 billion and, together with its subsidiaries, employs close to 16,500 people. The Bank’s securities are listed on the Toronto Stock Exchange (NA:TSX). For more information, visit the Bank’s website at www.nbc.ca.
Information: (The telephone number provided below is for the exclusive use of journalists and other media representatives.)
Manager, Public Relations Department
National Bank of Canada
Tel.: (514) 394-8644