February means RRSP season, and if you already have an RRSP somewhere it’s very likely that you’ve been receiving some communication promoting RRSP loans and all the wonderful things they can do for you! Let’s talk about this and figure out if taking out an RRSP loan is actually something that will be beneficial to you.
First off, it’s still a loan, and you’re going to have to pay off the principal and interest. Sure, you’ll get a beefed up amount on your tax return, but there’s really only a few circumstances where it’s actually worthwhile.
As we’ve discussed before, RRSP’s are the most beneficial when you make contributions in your highest possible tax bracket and then withdraw the funds in when you’re in the lowest possible tax bracket. That means that if you’re just starting out in your career and will potentially be earning way bigger bucks down the road, it makes sense to hold off on contributing to (TFSA’s are great to use in the meantime). This is especially true if you are considering an RRSP loan. To make up for the interest you are going to have to pay, you want your refund to be as big as possible, and this means you want to be in a high tax bracket. I’d recommend skipping the RRSP loan unless you are in one of the highest tax brackets. If you want to play around with the numbers, a little CIBC has a nice (and simple) RRSP loan calculator.
RRSP loans can also catch you in a bit of a loop where you need to keep getting a new one every year just to keep up with your contributions. If you’re making payments on your loan of $250/month that’s $250/month that you could instead be depositing directly into your RRSP and not playing catch-up all the time. Your goal with an RRSP loan is to be able to make your payments and also be able to contribute enough to avoid having to get a loan year after year. If you find yourself in your peak tax bracket and want to make up for missed years maybe, you can deposit two (or even three!) times as much. Tip: making monthly contributions help to break this up instead of having to come up with a lump sum when the RRSP deadline is looming.
Banks can also be a little tricky when pricing products like RRSP loans and they often have special interest rates that will only apply for the first year. Avoid this and keep your interest payments low by paying back your loan within one year instead of extending the term. If the payments are too high on the amount, you want it’s a pretty good sign that you’re biting off more than you can chew.