Investing in Your RRSP Without Cash on Hand? It’s Possible.
No cash to contribute to your RRSP? An RRSP loan lets you enjoy the tax benefits right away. Here's how.
We all know that contributing to an RRSP is one of the best strategies to reduce your taxes and prepare for retirement. But if you don’t have the cash to do it right now, is there still a solution for you?
Yes — with an RRSP loan.
What exactly is it?
An RRSP loan allows you to borrow money to maximize your contributions right away. In return, you enjoy the tax benefits immediately. What’s more, the tax refund you receive can be used to pay off part of the loan, which lightens that debt quickly.
Example
Imagine you borrow $10,000 to contribute to your RRSP. In return, you receive a tax refund of $3,000. That amount can be applied directly to reduce your loan, leaving you $7,000 to repay at your own pace.
The table below shows the amount of tax saved and the after-tax cost of a $1,000 RRSP contribution at different marginal tax rates.
| Marginal tax rate | Tax savings | After-tax cost |
| 25% | $250 | $750 |
| 40% | $400 | $600 |
| 45% | $600 | $550 |
Why could it be a good option?
- You maximize your contributions while benefiting from potential long-term returns.
- You lower your taxable income and enjoy a tax refund.
- You spread out the payments so it stays comfortable within your budget.
Another example
In this example, we see that with an annual contribution of $10,000 to an RRSP and an average return of 6%, you could accumulate nearly $132,000 after 10 years and nearly $368,000 in 20 years. The earlier you start, the more your savings benefit from compound growth!
The drawbacks to consider
Before moving forward, you also need to think about the risks. The interest on the loan can reduce the tax benefits if the interest rate is high. What’s more, if your financial situation changes (job loss, unexpected events), repaying the loan could become difficult. It is not a solution for everyone, and it must fit into a well-thought-out financial plan.
If you want to know whether an RRSP loan is a good option for you, or if you would like to explore the best investment options within your RRSP, don’t hesitate to book an appointment using the button at the bottom of the email.
Have a good week!
The “in-kind” transfer: contributing without selling your investments
An RRSP loan is not the only option. If you already hold investments in a non-registered account, such as stocks, ETFs or mutual funds, you can transfer them directly into your RRSP without selling them. This is known as an “in-kind” contribution.
Be careful, though: in the eyes of the tax authorities, this transfer is treated as if you had sold your investments. If they have gained in value, the capital gain becomes taxable in the year of the transfer. And if you transfer an investment at a loss, the loss is denied: you will not be able to deduct it. It is the kind of detail that can cost you dearly if you overlook it.
RRSP loan or in-kind transfer: how do you choose?
It all depends on your situation. The in-kind transfer mainly suits those who already hold non-registered investments and want to shelter their future growth from tax. The RRSP loan is better suited to those counting on future income to repay it. In both cases, the goal is the same: using your contribution room without waiting until you have the cash in hand.
Borrowing to contribute: precautions to take
Whichever route you take, borrowing to invest calls for caution. Unlike some other types of investment borrowing, the interest on an RRSP loan is not tax-deductible. The loan must also be repaid even if the value of your investments drops, and borrowing too ambitiously can put pressure on your budget.
- Limit the amount borrowed to what your budget can comfortably absorb.
- Plan to apply your tax refund directly to the loan to shorten its life.
- Make sure the strategy fits into your overall financial plan, not just RRSP season.
Every tax situation is unique. Before choosing between an RRSP loan and an in-kind transfer, take the time to discuss it with your advisor: the Pérennité team can help you weigh which option best suits your situation. Contact us.
