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A client came to me the other day looking to chat about the idea of borrowing to contribute to an RRSP.

Sound counterintuitive? Well, not always.

If you have no other debt and have unused contribution room in your RRSP, borrowing funds to contribute to your RRSP might be the thing for you, especially if you plan on using your boosted tax refund to pay down the loan.

Here are some things to consider:

  • Will the rate of return on your RRSP exceed the interest you will be paying on the borrowed funds? Interest you pay on the loan is NOT tax¬†deductible, so you have some risk of loss here.
  • Will the cash flow you will need in order to make the payments on the borrowed amount prohibit you from making future RRSP contributions? If so, think twice because this will most likely result in a lower overall investment long term.
  • If you have an unexpected life event (i.e.; lose your job), will you be able to continue to make the loan payments?
  • Will the loan stretch you too thin or put you in a position that prevents you from being able to access borrowings you may need for other reasons?
  • If you plan to access funds in a home equity line of credit, remember that your home is securing that borrowing. If you can’t pay it back, you could lose your house.

 

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