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RRSP season: Does it pay to borrow?

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RRSP season: Does it pay to borrow?

The final push for RRSP contributions may be on, but a lot of Canadians won’t be chipping in because they don’t have happen to have a tidy little sum of cash just sitting around. You can always borrow to make a contribution. But should you?

The answer is hardly straightforward. That means people need to think things through before asking for a loan.

“I’m not the hugest fan of RRSP loans for a few reasons,” says certified financial planner Julia Chung of JYC Financial in South Surrey, B.C. “You’re always working backwards — getting a loan, paying off the loan, and then getting a new loan the following year because you haven’t saved any money towards another year’s contribution, because you’ve been paying off a loan. It’s a vicious circle.”

Plus, the interest isn’t tax-deductible, Chung says, and “you’re married to investing with the institution that gave you the loan, at least for the life of the loan.

“Basically,” she adds, “it’s an option of last resort.”

That said, there may be certain times when it may make sense to borrow:

You have terrible credit and need to build it up

“At least in that scenario, you’re building credit on an asset that has the opportunity for growth, plus you get the tax deduction from the contribution which hopefully results in a tax refund, which you hopefully use to pay down the debt,” Chung says.

The loan is short term

You have a massive tax bill due, the income to pay off the loan in a short period of time, and a plan to get yourself in a savings position — rather than a loan position — the following year. This could be a good strategy, Chung notes.

Being able to pay off a loan quickly seems to be a key requirement. If you don’t, you may end up paying more in interest than what you get back in a tax refund.

“When you can see being able to pay it back in a year, it is a good idea to borrow so you can take advantage of saving for retirement and also get a break on taxes,” says Laurie Campbell, CEO of Credit Canada Debt Solutions, a registered charity with offices in Ontario and Quebec. “If you do receive a tax return, the money should automatically be applied to the outstanding loan to ensure it gets paid off in a timely manner.”

RRSPs aren’t for everyone, though, making it even more important for people to consider borrowing with caution.

“For those individuals in a lower income bracket, RSPs might not make sense simply because they may not be able to realize the tax savings with them,” Campbell says. Plus, when they retire, cashing in on their RSPs could put them over the threshold to qualify for the guaranteed income supplement.

“In their case, my advice would be a tax-free savings account, which will not affect their ability to qualify for the guaranteed income supplement,” Campbell says. “So the bottom line is RSPs are great for most but not all people.”

If you’re already drowning in debt, borrowing is probably not a good option, especially if that debt comes with high interest rates. If that’s the case, paying that debt off first should be the goal.

Financial experts agree that if contributing isn’t in the cards this year, now’s the time to start putting money aside for next year’s RRSPs.

“You should begin an automatic monthly contribution so that you can capitalize on contributions in the future,” Campbell says. “So many people think that because they cannot contribute thousands they should not contribute at all, but start out small — it could be as little as $50 per month — make sure it’s consistent and make sure it is never touched.”

Chung says she’d rather see people set up a regular monthly contribution than get a loan or scramble to make the RRSP contribution deadline at the last minute. 

“Planning and saving are boring, but they reduce stress and are proven to help you achieve financial goals,” Chung says. “Personal finance should be boring.  If it’s exciting, then that means there’s anxiety associated with it, and we have enough of that in our lives.”