Debt and the RRSP contribution – Worth it?

by JamieList on March 3, 2010

RRSP loans are generally recommended as a way to “jump-start” your savings, or advertised as a way to create wealth where it did not exist previously (check out this sample Google search I did – most of these entries encourage debt).  There are a number of strong opinions out there that can debunk the myth that borrowing to invest is  good for you.

Borrowing to invest is a tricky straegy at the best of times.  Using debt for investment will increase both the gains and the losses that you receive in the market.  However, using debt can mean that you lose more than you actually have – you have lost someone else’s money.  

Leverage can do more harm than good, and must be done carefully.  If you are going to make the executive decision to use debt to invest in the RRSP, then you should be able to answer yes to one or more of the following questions:

  1. Am I at the highest marginal tax rate? If you are, then you will get the maximum benefit (i.e. tax refund) from your RRSP deduction.  If you deduct at lower tax rates, you will get less in the form of a refund at tax time.
  2. Am I going to be able to pay this off before the next RRSP season?  If you are (or you expect some compensation, a bonus or some inflow of cash that you do not currently have) then go ahead.  If not, you will likely just be in the same boat next year, forced to borrow again, and get into a “vicious” circle of debt again and again.
  3. Am I going to get a cash refund by making the contribution?   If you are, then you can have some confidence that you will soon be able to reduce your debt.  If you are not going to generate a cash refund and instead only reduce your taxes owing, then you will not be able to reduce the balance of your “quick loan” at tax time, and you will be encumbered by a great deal of debt.
  4. Is your other debt generally under control?  If so, then you might consider this as a one-time event.  However, if the reason that you have not made an RRSP contribution in the past is because your cash flow is committed to servicing other debt burdens, then this is definitely a bad idea.  Spend time getting your debt under control, and then revisit your RRSP savings later on.

So, in general, an RRSP loan is not a good idea, unless you are simply using it as a bridge until you get other funds coming in.  Also note that the interest payments on RRSP loans are not tax deductible, so there is no added deduction benefit to the investor.

I would venture to guess that, over the long term, taking a year off your RRSP contribution would serve you far better in the long run.  Perhaps, instead of borrowing to make an RRSP contribution, you start a monthly deposit plan and get ahead of the debt curve.

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