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Does it make sense to borrow money for my RSP contribution?

Your RSP contribution could be the most important investment you make every year. So even if you haven't got cash on hand now, it can pay to borrow with an RSP loan or line of credit. But don't forget, credit applications are subject to meeting the financial institution's lending criteria, and using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest remains the same even if the value of the securities purchased declines.

Consider what happens if you miss a single $1,000 contribution at age 31. It doesn't sound like much, but if you were to factor in a 6% annual rate of return and assume you didn't make up for this contribution in a future year, you could witness a dramatic $9,285.72 reduction in the net value of your RSP by the time you reach age 71.

Here's another way to look at it --

The benefits of using credit to contribute
Borrow $1,000 and contribute it to your RSP $1,000.00
Return on RSP investment at 6%
   for 1 year:
   for 10 years:
   for 40 years:
$60.00
$791.00
$9,285.72
Repay loan over 12 months - total of payments $1,033.00
Loan interest paid over the 12 months $33.00

The example above assumes that your RSP earns 6% interest compounded annually, the loan interest rate is 6% compounded monthly, and the loan is repaid in 12 equal monthly installments of approximately $86. Rates are for illustrative purposes only. They are not intended to be representative of current rates.

It can also make good sense to invest your income tax refund in your RSP so it can earn tax-deferred income until it is withdrawn. Or you can use it to pay off your RSP loan early with no penalty, or to pay down your line of credit.

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