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Is an RRSP Loan a Good Idea?

    An RRSP (Registered Retirement Savings Plan) loan is a loan taken out to invest in an RRSP. The loan is secured by the RRSP investments and the borrower uses their future RRSP contributions to repay the loan. The concept of an RRSP loan is to allow individuals to invest more money in their RRSP, thereby increasing their retirement savings, and taking advantage of the tax benefits associated with RRSPs.

    In Canada, RRSP loans are offered by most banks and credit unions. The loan process is straightforward: the borrower applies for the loan, the loan is approved, and the funds are deposited into the RRSP. The borrower then uses their future RRSP contributions to repay the loan, along with any interest charged by the lender.

    The loan is secured by the RRSP investments, and the borrower uses their future RRSP contributions to repay the loan, along with any interest charged by the lender.

    In terms of interest rates, RRSP loans typically have lower interest rates than personal loans or credit cards. However, the interest paid on an RRSP loan is not tax-deductible. The interest on an RRSP loan is added to the loan balance and compounded, which means that the interest paid will increase over time.

    1. According to a 2019 survey by the Financial Planning Standards Council, only 34% of Canadians have a financial plan for retirement.
    2. The average Canadian retirement savings balance was $71,700 in 2019, according to the Canadian Bankers Association.
    3. In 2018, the average RRSP contribution in Quebec was $6,500, compared to the national average of $5,900.

    RRSP Loan Calculator

    The following table shows the impact of taking out an RRSP loan on a $10,000 investment over a 5-year period. The interest rate is assumed to be 5% per year.

    YearRRSP BalanceLoan BalanceInterest PaidLoan RepaymentRRSP Balance
    1$10,000$2,000$100$400$11,600
    2$11,600$2,400$120$400$13,120
    3$13,120$2,808$140$400$14,668
    4$14,668$3,269$163$400$16,301
    5$16,301$3,786$189$400$18,086

    As can be seen from the table, taking out an RRSP loan can be beneficial in terms of increasing retirement savings, but it also means paying interest on the loan and increasing the amount of money owed.

    Pros and Cons of RRSP Loans

    There are both advantages and disadvantages to taking out an RRSP loan. Some of the benefits include:

    • Increased Retirement Savings: By taking out an RRSP loan, an individual can invest more money in their RRSP and increase their retirement savings.
    • Tax Benefits: RRSP contributions are tax-deductible, which means that individuals can reduce their taxable income by contributing to their RRSP.
    • Lower Interest Rates: RRSP loans typically have lower interest rates than personal loans or credit cards.

    However, there are also some drawbacks to taking out an RRSP loan, including:

    • Interest Costs: The interest paid on an RRSP loan is not tax-deductible and will increase the amount of money owed.
    • Repayment Obligation: Borrowers must use their future RRSP contributions to repay the loan, which can limit their ability to make additional RRSP contributions in the future.
    • Opportunity Cost: By taking out an RRSP loan, an individual may be missing out on other investment opportunities that could have higher returns.
    • Default Risk: If the borrower is unable to repay the loan, their RRSP investments may be liquidated to repay the loan, which could have significant consequences for their retirement savings.

    As the population of Canada continues to age, the importance of retirement savings will become increasingly evident. With longer life expectancies and the decline of defined benefit pension plans, it is more important than ever for Canadians to plan for their retirement. RRSP loans can be a useful tool for individuals looking to boost their retirement savings, but it is important to consider the potential drawbacks before taking out a loan.

    • RRSP loans have been available in Canada since the introduction of RRSPs in 1957.
    • In 2019, the average RRSP contribution in Canada was $5,900, with the average loan amount being $7,000.
    • According to a survey by the Bank of Montreal, 1 in 4 Canadians have used an RRSP loan to boost their retirement savings.

    In the future, it is likely that we will see an increase in the use of RRSP loans as more individuals look for ways to increase their retirement savings. However, it is also important for individuals to consider alternative investment opportunities and to seek professional financial advice to ensure that they are making the best decisions for their financial future.

    RRSP loans can be a useful tool for individuals looking to boost their retirement savings, but it is important to consider both the benefits and drawbacks before taking out a loan. By investing more money in an RRSP, individuals can increase their retirement savings and take advantage of the tax benefits associated with RRSPs. However, it is also important to consider the potential drawbacks, including interest costs, repayment obligation, and opportunity cost, before making a decision.

    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

    Christopher - BSc, MBA

    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

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