Should I borrow money to buy RRSP?

If you're looking for a way to maximize your long-term savings, making investments to your registered retirement savings plan (RRSP) may be the solution you've been looking for.

A RRSP loans are a strategic way Canadians can borrow money while building their retirement funds. That said, like personal loans, there are some things you should know about before taking on more debt.

Lucky for you, KOHO has got you covered on all fronts when it comes to loans. So, stick around to learn more about RRSP loans below.

What is a Registered Retirement Savings Plan (RRSP)?

First and foremost, we need to clarify what an RRSP is. A registered retirement savings plan, also known as an RRSP, is a type of investment account Canadians can make to secure their financial future.

When you open an RRSP account, you'll have the freedom of making an RRSP contribution each year. And when doing so, you'll qualify for certain tax benefits on your yearly income tax. Additionally, any money that you make through your RRSP investments will remain tax-free until you make RRSP withdrawals to put toward expenses like school tuition or your mortgage. The maximum amount you can contribute to your RRSP account each tax period is 18% of your total income for the previous year.

What is an RRSP loan?

Now that you know a bit more about RRSP accounts, you may have some questions about what exactly an RRSP loan is and how it works. Essentially, an RRSP loan is another way Canadians can borrow money to make an RRSP contribution. However, because an RRSP loan is another bank loan, you'll need to repay the money you borrow from your financial institution or credit union.

Ultimately, as regular RRSP contributions serve as tax-deductible, using an RRSP to contribute to your RRSP savings could result in higher tax savings and a larger tax refund, meaning more money in your pocket.

Most financial institutions in Canada offer short and long-term RRSP loans. With a short-term RRSP loan, you'll typically need to repay the full amount within 12 months. On the other hand, a long-term RRSP loan can have a repayment term of up to 10 years, with monthly payments. The one you choose will depend on what makes sense for your financial goals and how much RRSP contribution room you have for the year.

What are the interest rates for an RRSP?

RRSP accounts use what is known as compound interest to grow your savings through earned interest. In this case, higher interest rates on RRSPs will generate higher returns on the money you contribute and your earnings long-term.

Reasons why you should take out a loan to make an RRSP contribution

When it comes to borrowing money, there are a lot of options for Canadians to consider, including lines of credit, payday loans, and other loans from personal loan lenders. So, what are the reasons why someone would go ahead and consider an RRSP loan over others? Here's a closer look at some of the benefits of RRSP loans:

You get a tax refund

One of the obvious reasons why you may want to take out an RRSP loan is because RRSP contributions can lead to a tax refund on your income tax. Keep in mind, however, that your tax savings will vary depending on your tax bracket.

Long-term financial growth

Another reason why it may make financial sense to apply for an RRSP loan is that it can help you maximize your long-term saving goals.

Flexible limits

RRSP loans offer flexible limits as well. In fact, most financial lenders offer payments up to $50,000. So, if you need to catch up on a contribution you missed from previous years or want to get ahead of the game on your investment, this lump sum loan payment is a great option.

Flexible repayment terms

As we mentioned, RRSP loans offer flexible loan payment terms that can range anywhere from 12 months to 10 years or more, depending on who you borrow from.

Deferred repayment

Lastly, some RRSP loans offer deferred repayments, which will give you enough time to get paid from your taxes and make your first payment.

Why you shouldn't get a RRSP loan

As with all types of loans, there are some drawbacks you should know about before applying for an RRSP loan, which we've listed for you below.

High investment returns are guaranteed

Because you'll be paying a loan interest rate on your RRSP loan, your investment into your RRSP growth needs to be more than the interest you pay in order for it to be worthwhile. Typically, an RRSP loan will make sense for those in a higher tax bracket compared to those in lower brackets.

It can put you in further debt

While, in a lot of cases, an RRSP loan can be beneficial to your long-term investments, you're still borrowing money at the end of the day, which comes with the risk of putting yourself in more financial debt than before.

It can't be used for other debt

Unlike other loans, borrowing money from your bank through an RRSP loan means that you can only pay money into your RRSP account. You won't be able to borrow money under this loan and put it toward other debt or other purchases.

What is the difference between a TFSA and an RRSP?

If you're looking to save money, you may have been introduced to a tax-free savings account or TFSA and questions whether you should open a TFSA vs RRSP. Essentially, a TFSA is another savings account that allows you to hold different assets like stocks, mutual funds, and your money.

In contrast, an RRSP is an account most Canadians open for their long-term retirement savings. Both are good options. However, if you're thinking long-term, an RRSP will be more beneficial, while a TFSA is great for short-term plans for spending and saving.

Can I get an RRSP loan with bad credit?

The reality is that you may not be able to get a personal loan with bad credit from the majority of personal loan lenders in Canada. So, when a lender requests your credit history from a credit bureau, having a good credit score is something that will work in your favour. Lenders will also look at your employment income and the amount of your existing debt before approving or denying your application.

Worried about your credit score? Get a free credit score check before and build your credit with KOHO by opening a virtual credit card and paying off your monthly bill on time! To make sure you can make your payment, you may also want to consider overdraft protection coverage.

Contact KOHO for financial solutions you can count on

No matter how close you are to retirement, having an RRSP account and contributing to it annually is a great way to secure your financial future.

Whether you're looking to kick-start your savings with a high-interest savings account, which is great for your short and long-term financial goals. Contact us today for customized financial solutions tailored to your needs.