Is an RRSP loan a good idea?
Should you borrow money via a loan offered by Canadian banks to make contributions to your Registered Retirement Savings Plan (RRSP). According to a recent MoneySense article, that depends. Currently RRSP loans are at a bank prime rate of 3.95%, which Heath says is advantageous. Further, most Canadian banks will lend up to $50,000 with a repayment period of up to ten years.
RRSPs are most beneficial if you had a high income year, perhaps with bonuses, in 2019, but expect to withdraw funds in a future low-income year. Low-income earners are more likely to benefit from a tax-free savings account (TFSA) as opposed to an RRSP.
- Since stock markets go up 67% of the time, you may do better making a monthly lump sum payment into a RRSP rather than taking out a loan.
- A lump sum payment is likely to outperform dollar-cost averages over a 5-year period of time.
- Canadians considering RRSP loans should carefully examine their monthly cash flow, current debt and tax bracket before taking on more debt than they can really afford..
“RRSPs are generally a beneficial tool if you can contribute in a high-income year and withdraw in the future in a low-income year.”