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Canajun Finances Home » RRSP Loans, are they the right thing?

RRSP Loans, are they the right thing?

So one of the tricks financial planners like to pull out of their hats (in Canada at least), if you are going to receive a refund, you use a short-term LOAN to buy more RRSPs and thus MAX out your RRSP.

If I was going to get a refund of $1200, if I took out a loan for $1560.00 I could max out my RRSPs. This assumes I am taxed at a rate of 30%, and that I pay off the loan right away (and I have $1560.00 in RRSP room as well). You don’t understand still? Let’s do the math:

  • I would be getting $1200, so I could simply get a loan for $1200 and buy RRSPs with that, BUT I would then get a $1560 refund, because of the extra RRSPs that I bought
    • Remember if you buy $1200 worth of RRSPs, your marginal rate is 30%, you would get $360 back for buying the RRSPs.
  • So, I should take a loan for $1560 or so, and I will get more than $1560 in refund back (not much more, but a little), which I can then pay off the loan (this is REALLY important guys, don’t leave the loan hanging around). This means you now have more money in your RRSPs! Cool eh?

The important things to remember is, if you were planning on using your refund to pay down your mortgage or some other debt, that is good too. Don’t get convinced that the only good idea is to get a loan to max out your RRSPs! Pay off the darn loan if you get it as well!

DON’T BORROW THE MONEY FROM YOUR CREDIT CARD (can I be more exact, don’t do it). Don’t borrow at all if possible.

It’s an idea, but not the ONLY good idea at RRSP time

Feel Free to Comment

  1. … and if you look at today’s article, that is exactly what I espoused! Great minds think alike I guess (although what I am doing including myself in there, I have no idea).


  2. Oh sorry I think I get it now. You’re talking about the specific case where you get an RRSP loan and apply the upcoming refund to the loan. I didn’t get it at first.

    Another strategy is to just take your refund in April 2006, for example, and contribute it to your RRSP for 2006, in addition to your monthly contributions (if the monthly contributions aren’t enough to max out your RRSP of course). Then in 2007 you can make a larger deduction. This is almost the same thing but does not involve taking out any loan or predicting what you think you might get back in April.

  3. Not if you assume you were going to get $1200 back in the first place.

    If I am receiving $1200 in refunds (for whatever reasons), I could just take that money and run. If I assumed that if I borrowed money to buy $1200 MORE or RRSPs, my refund would then be $1560 (i.e. $1200 initial + $360 in EXTRA refunds from the EXTRA RRSPs I bought with the LOANed $1200).

    So now I have borrowed $1200 (because I was going to get that back anyway) but because of this and the RRSP I bouth I am now getting $1560 back. If I borrowed $1560, and bought that much RRSP, I would get back $1668 (I think)), I take the refund, pay back the loan.

    Thus I have $1560 more in my RRSP, a paid off loan and another $90 (appx) in my pocket.

    Guess I’m not being that clear, sorry –C8j

  4. Sorry something here doesn’t make sense. What does a refund for $1200 or $1560 have to do with an RRSP contribution of $1200 or $1560? The amount of a refund has to do with 1) your RRSP deductions (not contributions) 2) your other tax credits, and 3) how much money your employer deducted.

    Even if a refund was only based on RRSP deductions and your employer deducted the exact amount of tax from your paycheques, an RRSP deduction of $1200 at a 30% tax rate would net you a refund of $360. Actually you mentioned the number $360 in your post, but then in the next sentance you say “I should take a loan for $1560 or so, and I will get more than $1560 in refund back.” In order to get a $1560 refund you would need to make an RRSP deduction of $5200.

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