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3 Things to Consider Before Borrowing for Your RRSP Contribution

by Super User
in Blog
on 03 February 2020
Hits: 316

It is not unusual for individuals to lack the necessary funds to make an RRSP contribution in any given year. Therefore, it is common for financial institutions to readily lend individuals the money needed to make an RRSP contribution. While this strategy may work for some, there are a few things that should be taken into consideration before implementing a plan such as this.

 Below are three key considerations for borrowing for your RRSP.

  • Can You Pay Back the Loan Quickly?

This strategy only makes sense if you can pay back the loan quickly without hindering your ability to make your contributions for the current year as well. If repaying your loan will strap you to the point that you can make the current years RRSP contributions, you will just be back to borrowing. In these situations, the only real winner is the lender.

  •  Why Do You Need the Loan?

Ask yourself why you need a loan before borrowing for your RRSP. Is it because you simply do not have the earnings to contribute? Or do you have the earnings but do not have a disciplined savings plan in place? If it is the former then you should consider how you expect to pay the loan back. Your refund will not provide enough cash to wipe out the entire balance of the loan.

If the reason is that you have the earnings but not the savings plan, then it is time to talk to your advisor. Instead of taking on more debt, you should be focused on making a plan that will stand strong in the long term. Making monthly contributions to an RRSP is a simple way to make sure you max out your RRSP and lessen the burden of a lump sum contribution.

  • Do You Have Other High Interest Debt?

There is such thing as good and bad debt. Borrowing for an RRSP contribution could be classified as good debt, as long as you do not have excessive amounts of bad debt that need your attention first. If you have balances owing on credit cards, lines of credits, or other high interest debts, it makes little sense to add to your debt load. High interest debts should be a top financial priority and should be taken care of before borrowing even more.

THE BOTTOM LINE

Borrowing money to invest for your retirement can have its advantages, but it is important to ensure that you are in a financial position to take care of the debt promptly while still remaining on track with your financial goals. Talk to a financial advisor to determine the best strategy for you to maximize the potential of your RRSP.

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