RRSP Loans

An RRSP loan is simply a tool used to get your money into your RRSP before the "contribution deadline" which is the end of the 60th day of the following year.  So for example if you want your RRSP contribution to count for your 2007 return, you need to make a deposit into your RRSP account either during 2007 or within the first 60 days of 2008.

The reason RRSP loans have become so popular is that people procrastinate.  They do not contribute to their RRSPs on a regular monthly basis so they have to take out a loan in order to put in as much as they can.  The reason people want to put as much as they can is for the tax refund and to ensure that they are indeed contributing as much as they can towards their retirement.

Why people wait until the last minute is just a psychological issue.  It’s the same with taxes – people file taxes right on the last day – not because they’ve been crunching numbers trying to find every last penny in savings, but because they are procrastinators.

I’m going to write a series on RRSP loan strategies in the future – because most people are only familiar with the concept of borrowing a lump sum and paying off part of the loan with the refund, thereby reducing the monthly loan payments and freeing up cash flow – uhh… better put that into numbers!:

Let’s say Bob has \$200/month that he can put towards retirement savings.  If he put in \$200/month, he could contribute \$2400/year to his RRSP.  And Bob knows that since he is in the 35% marginal tax bracket he will get (\$2400 x 35% =) \$840 back on his taxes. After doing some quick math, he realizes that he can increase his contribution by getting a loan for \$3692 –> which will provide a refund of \$1292 (\$3692 x 35%) which he can apply to the loan to reduce the loan balance to \$2400.  He can then pay that off in 12 months at \$200/month.

So, in effect what Bob has done is contribute A GREATER AMOUNT to his retirement savings while maintaining his \$200/month budget for savings.  (There will be some interest of course on the RRSP loan so it will be closer to \$208/month – but you get the gist of the concept.)  I’ll go over it again in the series of RRSP Loan Strategies – there are tonnes!

Preet Banerjee