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

Your RRSP contribution could be the most important investment you make every year. So even if you don't have cash on hand now, it can be beneficial to borrow with an RRSP 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 RRSP 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 RRSP $1,000.00 Return on RRSP investment at

6%: 

for 1 year: $60.00

for 10 years:  $791.00

for 40 years:  $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 RRSP 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 or future rates of return.

It can also be of benefit to invest any income tax refund in your RRSP so it can earn tax-deferred income until it is withdrawn.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

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