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  • What about them RRSP loans eh?

    by:
    Emma Rogers

    Oh Canada! Land of angelic bankers and borrowers! Your love of the line of credit is well documented but what about your love of the RRSP loan? An RRSP loan is used specifically for your retirement plan often with the goal of getting enough of a tax refund to pay off some of the loan balance or to reduce the amount of tax payable.

    What a great idea, right? Wrong!

     A loan is a loan and it must be paid back with interest so, like any loan, you need to be sure that you can afford the repayments. Whilst borrowing to save may sound like a great idea it really is contradictory in terms. If you are considering an RRSP loan you need to ask yourself why you are borrowing to save. If you're borrowing because you can't afford to save then forget about it! Since the deadline for this year has come and gone it's a good time to start thinking how you can avoid an RRSP loan next year.

    When you ask about an RRSP loan at the bank they’ll say “duh winning! Max out!” because the person you’re talking to has targets to meet. Every situation is different but please keep in mind that RRSP season is to your bank what Christmas is to the retail world. Like any advice you need to weigh up the pros and cons for your own situation. If your tax refund is going to cover every single cent you’ve borrowed and you know that you’re disciplined enough to actually use your refund to pay your loan balance then go for it. But what if your refund doesn’t cover the loan balance? Your retirement loan then becomes another bill that needs to be paid at the end of the month and if you’re struggling as it is then your ‘savings loan’ can turn into a big regret fast.

    Some people use an RRSP loan as a way to force themselves into saving for retirement but why not just set up a direct payment from your chequing account to your retirement plan every payday? This is a great way to not only save in a more manageable way without a loan but it also allows you to purchase securities at a range of different prices throughout the year rather than a lump sum purchase at tax time. This can save you some money. Do some research on ‘dollar cost averaging.’

    I’ll be doing my taxes this weekend so if any of you out there have any tips on how to maximize your return please let us know!

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