February 15, 2011, 5:00 am

Get Fooled Solid: Take Out an RRSP Loan

by: The Financial Blogger    Category: RRSP
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We are in the middle of the RRSP season and I am pretty sure that your financial advisor already called you for your contribution. You don’t have the money to contribute to your RRSP this year? Since it’s very important to prepare for your retirement and we take your financial situation to heart, we are going to offer you an RRSP loan. I Call BS on this one!

Why taking out an RRSP loan is bad for you

There is actually one specific strategy where the RRSP loan is good: when you are about to buy a property. I’ll cover that later on. But for now, get this straight in your mind: RRSP loans are only good for the bank, NOT YOU!

Why? Fundamental mathematics will show you why J

Let’s say you take out a $10,000 RRSP loan with an amortization of 5 years. For the sake of calculation, let’s assume your RRSP loan is at a very good rate of 6.5% for 5 years (fixed rate). If you pay monthly, your RRSP loan payment will equal to $195.66.

If you invest this money and make a 6% yield, you will have $13,382 in your investment account after 5 years. However, if you setup a periodic investment of $195.66 per month during 5 years and make the same 6%… you will end-up with $13,651. I agree that this is not a huge difference, but if you take out an RRSP loan every 5 years instead of investing regularly during the next 25 years, then you get:

RRSP loan every 5 years: $130,246

Periodic investment: $135,591

There is more about the RRSP loan:

If you take out a 10K RRSP loan, you will invest this money in one shot. Over the long run, it won’t make a big difference but you might bit your nails at first if you start investing right before a crash. Just think of people who did this strategy back in 2008! If you make preauthorized investments, you will be able to average the cost of your investments which will smooth out any dip in the market.

The last point is the amount of RRSP contribution vs your marginal tax rate. If you are right over a tax bracket and take a big loan of 10K, you will get a smaller tax return than if you add your 5 years of smaller contributions. You must take a look at your marginal tax rate to know if this advice is good for you or not.

RRSP loans can be good if…

If you plan to buy your first house this summer and you are thinking of using the HBP.  You can take an RRSP loan, get a bigger tax return and withdraw your investment to pay off your loan under the HBP. Then, you won’t have an RRSP loan anymore but you will have benefitted from a tax return to boost your cash down. This could be an interesting strategy (just remember that you must keep your investment within the RRSP account for at least 90 days before withdrawing them under the HBP!).

If you take an RRSP loan over a short period of time (12 to 24 months), then it will be worth it. Chances are that the interest paid on the loan will be minimal and if you are lucky enough, you will benefit from a gain on the stock market.

You want a clear answer on RRSP loans? Ask your advisor!

If after reading this column you are confused about whether or not you should take a RRSP loan, ask your financial advisor to make both calculations:

A)    What is going to happen to my investment over the next X years if I take a loan?

B)     How much would I get if I take the payment loan amount and invest on a monthly basis with it?

Remember, people may lie… numbers don’t 😉

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Another good use for an RRSP loan is for an RRSP gross-up.

I currently plan to borrow my gross-up at 3%, and pay the loan off in full with the tax refund this will generate next month.

In your calculations, what happens to your tax refund? what if one took that refund and put it towards higher interest rate loans? Or their mortgage? I think it can be benifical as long as you do something smart with your refund.

@ DanP,

I didn’t take them into consideration as:
#1 if you take a huge RRSP loan, chances are that you have maxed out your RRSP contribution
#2 you will get the tax return each year if you do a systematic investment
#3 by doing a smaller amount of RRSP contribution each year, you ensure to get the maximal tax return (as you are always playing on your higher marginal tax rate).

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I would like to see your math. It doesn’t make sense that you would make more interest on investing 2000 a year vs 10000 initially…unless you’re factoring in interest paid vs interest earned…
For somebody that is using the tax refund for paying higher interest loans off or people that just can’t save to put money away but don’t have a problem making payments, or somebody who pays the loan off with their refund, a loan is a great way to make sure they are saving all they can.
RRSP loans are a great tool when used properly, you just don’t seem to understand this.

by: The Financial Blogger | July 20th, 2012 (10:31 am)


use your math calculator and you will see that you will end-up with a bigger amount if you invest $195.66 per month for 60 months (5 years). The reason is simple. In the case of the RRSP loan, you invest 10K and wait for 5 years. If you invest the equivalent to the RRSP loan payment, you will end-up investing $11,739.60 over 5 years. The money coming out of your pocket in both situation is the same ($11,739.60) in both situation. If you take a lower investment return (4% for example), the difference is even bigger (roughly$800 more if you invest monthly).

As for the tax return, you will end-up getting the same (or higher) tax return over the period of 5 years. You could get a higher return with a monthly investment in your RRSP if your salary has not over 10K over the next tax bracket. This is also something to consider.

You definitely get more money in your pocket if you invest systematically. In fact, if you setup a monthly investment with your advisor, the payment will go in your account like it was a debt payment.