I’m sure you have heard people talk about the so-called “RRSP Season” that ends on February 29, 2024. I was a part of that conversation in my article on how to increase your Canada Child Benefits by contributing to your RRSP.
To clear the air, you can contribute to your Registered Retirement Savings Plan (RRSP) all year round if you have an RRSP contribution room.
The 60-day deadline for every new calendar year (e.g. January 1 – February 29, 2024) is just a deadline for RRSP contributions you can claim in deductions for the prior year’s tax return (e.g. 2023 tax year).
Some Canadians take out RRSP loans to use up their RRSP contribution room. When does it make sense to take out an RRSP loan?
Key Takeaways
- It may make sense to take out an RRSP loan if you are in a high tax bracket and will enjoy significant tax savings when you claim your deduction.
- Using an RRSP loan can be a bad idea if you have high-interest debt or won’t be able to pay back the loan quickly.
- Ensure the benefits outweigh the interest charged by the loan.
Scenarios where an RRSP loan may make sense
1. You are in a high tax bracket
It generally makes sense to put funds in your RRSP if you are in a tax bracket that is higher now than what it would be when you are in retirement. The higher your tax bracket now compared to when you retire, the greater the tax savings.
This differential in taxes paid now instead of later may make the case for maximizing your RRSP before using up your Tax-Free Savings Account.
Also, the tax refund you get from making RRSP contributions is based on your marginal tax rate. When using an RRSP loan, the plan could be to pay back a substantial part of the loan with a tax refund.
For example, say your income is $100,000,and you take a loan of $9,000 to contribute to your RRSP. At a marginal tax rate of 43.4% (Manitoba), you can expect a tax refund of $3,906. This refund amount (43.4% of your total loan amount) can significantly lower the overall interest you pay on the loan.
2. You want to pay off your loan quickly
Even in a high tax bracket, taking out an RRSP loan only makes sense if you can pay it off quickly.
Although borrowing cost is lower these days, you still pay interest on RRSP loans. The longer you owe the bank, the more interest you will pay.
Interest paid on an RRSP loan is not tax-deductible. Therefore, if you can’t afford to pay off the loan quickly (in a year or less), the bank may be the only winner!
One strategy to ensure you pay interest on the loan for just a few weeks is to borrow the amount you are expecting back as a tax refund.
Related: What are Group RRSPs?
When not to take out an RRSP loan
1. You are in a low tax bracket
If you currently earn a low income, you may want to carry forward your RRSP contribution room to future years when your income is higher.
A low tax bracket also means low tax savings. Utilizingyour annual TFSA contribution limit may be the savvy thing to do for now.
2. You have other high-interest debt
If you have credit card debt and other high-interest debt, it is better to focus on paying off these debts and not take on further debt via an RRSP loan.
The interest rate payable (20% or greater) on credit card debt far outweighs any potential returns you will make from investing in your RRSP. Pay off high-interest debt first!
3. You have poor financial discipline with debt
If you find it difficult to pay off debts you owe, taking on any kind of debt is a bad idea.
Conclusion
Not everyone has money lying around to invest a lump sum in an RRSP. One way to get around the last-minute rush to beat the “RRSP Season” deadline is to make regular small contributions throughout the year.
If you are considering taking out an RRSP loan, carefully consider the interest rate being offered, your marginal tax rate, and your ability to pay back the loan quickly.
Also Read:
- RRSP Basics You Need To Know
- Is OAS Taxable?
- CPP Payments: What You Need To Know
- The Defined Benefit Pension Plan is the Real Deal
- Retirement Benefits: The Old Age Security Pension
Looking to invest your RRSP in a hassle-free investment account with a low management fee? Consider Wealthsimple Invest.
FAQs
Gray said investors also need to remember that an RRSP loan is adding debt and it could impact your credit score and affect other borrowing.
What is the 4% rule for RRSP? ›
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
What is a good amount to have in an RRSP? ›
Generally speaking, you should aim to contribute at least 10% of your gross income each year to your retirement savings. Start contributing in your early 20s, and that 10% per year could add up to a sizeable savings and a comfortable retirement. Start later in life—say, your late 30s—and 10% a year may not cut it.
What is the minimum amount for a RRSP loan? ›
In most cases, you can get approved quickly for a minimum amount of $1,000 with a fixed or variable rate.
What is the difference between a RRSP loan and a line of credit? ›
With an RRSP loan, you borrow a set amount that goes directly into your RRSP. You pay it back, with interest, within a set time frame. With an RRSP line of credit you get access to a set amount of money and any money you borrow goes directly into your RRSP.
Is it worth using RRSP to pay off debt? ›
You will pay income tax : the amount withdrawn from your RRSP could move you into a higher tax bracket. You could jeopardize your retirement : by withdrawing funds from your RRSP before retirement, you're only postponing your debt problems.
What is the 3 year rule for RRSP? ›
Spousal RRSPs come with a three-year attribution rule, which only permits withdrawals three years after the deposit date. So, for example, if you deposit funds into a spousal RRSP on January 1, 2024, your spouse or common-law partner won't be able to withdraw the funds until January 1, 2027.
How long will $2 million last in retirement? ›
In fact, if you were to retire even 15 years from 2021, $53,600 would be about $79,544 in 2036 dollars, assuming a 2.5% inflation rate from now until then. Using that as your annual expenses, you could retire for about 25 years on $2 million.
How long will $500,000 last in retirement? ›
Summary. If you withdraw $20,000 from the age of 60, $500k will last for over 30 years. Retirement plans, annuities and Social Security benefits should all be considered when planning your future finances. You can retire at 50 with $500k, but it will take a lot of planning and some savvy decision-making.
How much does the average Canadian have in RRSP? ›
According to Ratehub, the average 65-plus-year-old Canadian has $129,000 saved in their RRSP. The figure rises to about $160,000 if you include the Tax-Free Savings Account (TFSA). In total, the average retiree has $319,000 saved.
You can use this to assess whether you need to catch up on your retirement savings: At age 35, you should have saved the equivalent of your annual income. At age 40, 2.1 times your annual income. At age 50, 4.6 times your annual income.
What is the average rate of return on RRSP in Canada? ›
Registered Retirement Savings Plan (RRSP) Rates
| Table Summary | 1 Year | 5 Year |
|---|
| Group Highest | 5.150 | 4.500 |
| Group Average | 4.510 | 4.070 |
| Group Lowest | 2.100 | 3.200 |
Mar 4, 2024
How is your RRSP deduction limit determined
- The lesser of the two following items: 18% of your earned income in the previous year. the annual RRSP limit (for 2023, the annual limit is $30,780)
- That exceeds one of the following items: your pension adjustment (PA) your prescribed amount for connected persons.
In the year a RRIF owner turns 60, their minimum withdrawal is 3.23% of the account value at the end of the previous year. At 65, the rate is 3.85%. At 70, it is 4.76%. A sustainable withdrawal rate can be impacted by capital inflows a retiree expects in the future.
What is the age limit for RRSP withdrawal? ›
Withdrawing money from an RRSP before you reach the age of 71 is possible, but you'll have to pay tax unless you're using the funds for the Home Buyers' Plan (HBP) or the Lifelong Learning Plan (LLP). Once you withdraw money from your RRSP, it's generally counted as income and you lose the contribution room forever.
Does borrowing a loan affect credit score? ›
A personal loan can affect your credit score in a number of ways—both good and bad. Taking out a personal loan isn't bad for your credit score in and of itself. However, it may affect your overall score for the short term and make it more difficult for you to obtain additional credit before that new loan is paid back.
What are the disadvantages of RRSP withdrawal? ›
You'll miss out on the advantages of compound interest
This is compound interest. When you take money out of your RRSP early, you lose the opportunity to earn money while it's invested. Remember, the government will not tax you on money growing in your RRSP until you take it out.
Does getting denied for a home loan hurt your credit? ›
No, denied credit applications won't appear on your credit report. Lenders don't report whether your applications were approved or denied because even approved applications don't necessarily result in a new account.
Can you use RRSP as collateral for a bank loan? ›
In some cases, you may be able use money in your RRSP as collateral for a bank loan. This may not be allowed depending on your bank policy or RRSP administration agreement. Make sure you get expert advice from a tax planner or financial advisor before you go ahead. If you don't follow the rules, you'll have to pay tax.
