Borrowing to contribute to your RRSP
In some cases, it may be to your advantage to borrow money to contribute to your RRSP, as long as you use the tax refund to pay off part of the loan.
Example
- Your taxable income is $50,000.
- You contributed $2,000 to your RRSP this year.
- You borrow $8,000 to increase your contribution to $10,000.
- You get a 2-year loan at 5.35%1 interest.
- You receive a tax refund of $3,840 (2012 tax rate).
- You use this amount to reduce the loan balance immediately to $4,160 ($8,000 - $3,840).
- Then, if you decide to pay off the balance within 2 years, the loan will end up costing $236.
- Ultimately, you benefit from an additional $8,000 RRSP contribution and pay back a $4,396 loan.
| Time span | Value of the $2,000 contribution2 | Value of the $10,000 contribution2 |
|---|---|---|
| After 10 years | $3,582 | $17,908 |
| After 15 years | $4,793 | $23,966 |
Tools and tips
RRSP: Don't wait
The sooner you start contributing, the better!
Read tip - The advantages of making early RRSP contributions
Unused RRSP contribution room
If you haven't been contributing your maximum, you can catch up by using your unused contribution room in subsequent years.
Couples can pay less tax
The higher-earner can contribute to his or her spouse's registered retirement savings plan (RRSP).
HBP: Using your RRSP to buy home
How to withdraw part or all of your RRSPs without paying income taxes.
Read tip - Withdrawing from your RRSP without penalty to buy a property
Should you put your savings in an RRSP or a TFSA?
It all depends on what you want to do with your money.
- Interest rate on a 2-year RRSP loan as at January 18, 2012.
- Based on a 6% compound return assumption for a balanced portfolio (45% in fixed income and 55% in equity) – return based on 2011 Projection Assumption Standards of Institut québécois de planification financière.