{"id":1092,"date":"2021-02-21T18:26:49","date_gmt":"2021-02-21T18:26:49","guid":{"rendered":"https:\/\/www.thomascchan.com\/old\/?p=1092"},"modified":"2021-02-21T18:26:50","modified_gmt":"2021-02-21T18:26:50","slug":"should-you-consider-getting-an-rrsp-loan","status":"publish","type":"post","link":"https:\/\/www.thomascchan.com\/old\/should-you-consider-getting-an-rrsp-loan\/","title":{"rendered":"Should you consider getting an RRSP loan?"},"content":{"rendered":"\n<h1>Should you get an RRSP loan? <\/h1>\n\n\n\n<p>If there\u2019s one key takeaway from this post on RRSP loan, it\u2019s this:<strong> don\u2019t do it.<\/strong> In this blog, I\u2019m going to cover what is an RRSP loan, how does it work, the pros &amp; cons of a RRSP loan and is it a good idea to borrow money for RRSP. Did you know 8 out of 10 times, we could be doing the RRSP loan wrong? As a financial advisor for over 10 years, I typically do not recommend an RRSP loan for the average Canadian.\u00a0<\/p>\n\n\n\n<p>Right now as we are entering the RRSP season where you\u2019ll see lots of banks are promoting RRSP. Included in promoting for RRSP, they\u2019ll also tell you about the benefits of getting an RRSP loan. The banks make them sound very attractive for everyone but the reality is that it is only beneficial to a few people. Read on to see if it\u2019s you.\u00a0<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"ast-oembed-container\"><iframe loading=\"lazy\" title=\"RRSP 2021 | RRSP LOAN - Do it or Don\u2019t Do it ?!? \ud83d\udd75\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/UoUqfaH_s8M?start=418&#038;feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<h2>What is an RRSP loan and who is it for?<\/h2>\n\n\n\n<p>An RRSP loan is an example of <a href=\"https:\/\/www.youtube.com\/watch?v=UoUqfaH_s8M?sub_confirmation=1\" target=\"_blank\" rel=\"noreferrer noopener\">\u201cborrow to invest\u201d<\/a>. It\u2019s a special loan that you can use towards your <a href=\"https:\/\/www.thomascchan.com\/old\/rrsp-101\/\" target=\"_blank\" rel=\"noreferrer noopener\">RRSP<\/a> contributions. From a consumer\u2019s perspective, this loan is attractive because it\u2019s easy to approve and the interest rate is often pretty low. The idea is that you take on the loan, put that money into your RRSP and boost the tax return, and then you take the tax return to pay off a portion of what you borrowed.\u00a0<\/p>\n\n\n\n<p>What\u2019s more, the first payment is usually deferred by 90 days, meaning that if you take an RRSP loan in February (which is before the RRSP deadline) you can generate a tax refund in April to pay down a huge chunk of your loan. So, an RRSP loan is an option that gives you a better tax return as well as some time.<\/p>\n\n\n\n<h2>When to consider an RRSP loan\u2026\u00a0<\/h2>\n\n\n\n<p>Let\u2019s go through an example. Let\u2019s assume Jane is in the 40% tax bracket. She has $10,000 and is ready to contribute to her RRSP before the deadline. She still has $50,000 room for her RRSP. What Jane could do is borrow an additional $40,000 from the RRSP loan to top up her RRSP. In this scenario, she can get $20,000 back in tax returns. She can then use the $20,000 towards her loan and pay off the remaining $20,000 over the course of the year. And now she has $50,000 in her RRSP account.&nbsp;<\/p>\n\n\n\n<p>Perfect scenario!<\/p>\n\n\n\n<p>An RRSP loan is especially useful if you are in the following 2 scenarios:&nbsp;<\/p>\n\n\n\n<p>1) If you received a sudden huge bonus or paycheck.&nbsp;<\/p>\n\n\n\n<p>2) If you are coming close to retirement and have a lower income.<\/p>\n\n\n\n<p>In these two cases, an RRSP loan can help you to defer tax, top up your RRSP contributions and save income for your retirement.<\/p>\n\n\n\n<h2>When to avoid getting an RRSP loan\u2026\u00a0<\/h2>\n\n\n\n<p>Now let\u2019s have a deeper look at some situations where an RRSP loan might not be ideal. In the past ten years, I find that people who use an RRSP loan find themselves in an endless circle of borrowing and paying off debt. So it does more harm than good!&nbsp;<\/p>\n\n\n\n<p>I\u2019ll go over 3 major drawbacks and I also want to also talk about alternatives.<\/p>\n\n\n\n<h2>3 Major drawbacks of the RRSP loan<\/h2>\n\n\n\n<ol><li><strong>Vicious cycle of borrowing and paying off the loan<\/strong><\/li><\/ol>\n\n\n\n<p>This is the core problem. Usually, someone doesn\u2019t have enough money to contribute &#8211; so they end up borrowing. But now they are busy all year paying off the loan. Next February they find themselves in the same situation again. They don\u2019t have enough money to contribute to their RRSP. So they take another loan &#8211; and they are playing catch up again. Usually, the banks can offer the loan period up to 2 to 5 or even 10 years. That also means you are using 2 years to pay off 1 year of the loan.<\/p>\n\n\n\n<p>Remember: the essence of an RRSP loan is to top up, not to play catch up!<\/p>\n\n\n\n<p>The problem here is a behavioral aspect. If you don\u2019t have the discipline to contribute to your RRSP regularly throughout the year, then how do you expect to stick to a loan payment over the next 12 months?<\/p>\n\n\n\n<p>And If you do have the discipline, don\u2019t use it for an RRSP loan. Instead, contribute to your RRSP account regularly throughout the year.<\/p>\n\n\n\n<ol start=\"2\"><li><strong>It hurts your purchasing power<\/strong><\/li><\/ol>\n\n\n\n<p>For your RRSP loan, you have to pay both principal and interest together per month.&nbsp;<\/p>\n\n\n\n<p>If you want to get a mortgage, for example, the bank will look at your TDSR. TDSR stands for \u201cTotal debt service ratio.\u201d This is the percentage of your income you are allowed to use for housing or car leases. It refers to the portion of a borrower&#8217;s gross monthly income that goes towards repaying the monthly obligations, including the loan being applied for. Usually the magic number is 40 \u2013 44%. Meaning your monthly debt payment cannot be 40% more of your monthly gross income.<\/p>\n\n\n\n<p>Using the previous example, let&#8217;s say you are paying $2,000 a month to pay off the RRSP loan, and your income is about $10,000 a month, that means your loan is eating away 20% of your TDSR.<\/p>\n\n\n\n<p>Sometimes an RRSP loan might not be reflected in the credit bureau &#8211; but would you like to take that risk when you are applying for your next mortgage?<\/p>\n\n\n\n<ol start=\"3\"><li><strong>Tighter cash flow<\/strong><\/li><\/ol>\n\n\n\n<p>What\u2019s more, an RRSP loan limits your cash flow for the next 6-12 months because that is the usual timeframe it takes to pay back your loan. Think about it, even if you \u201conly\u201d need to pay $250 a month towards your loan &#8211; that\u2019s $250 you can\u2019t use for anything else.<\/p>\n\n\n\n<p>What if something unexpected happens? Any extra payments around the house of car repairs could be a risk to you. In the end, you might have to borrow even more money &#8211; like a line of credit or owe a credit card balance. And those interest rates are much higher. Or you have to take out from your RRSP again, which adds on your this year\u2019s income.<\/p>\n\n\n\n<p>As you see, it can quickly turn into a vicious cycle. So be smart about it.<\/p>\n\n\n\n<p>I am a person who also believes in borrow to invest, but an RRSP loan is not the best idea in many situations. However, here are some alternatives that you might want to consider.&nbsp;<\/p>\n\n\n\n<h2>Alternatives to RRSP loans<\/h2>\n\n\n\n<p>If you need to top up your RRSP but you have no additional source:<\/p>\n\n\n\n<p>You can take out some of your TFSA accounts and top up your RRSP contribution.&nbsp;<\/p>\n\n\n\n<p>Unlike RRSP, the room for TFSA will reset after the calendar year. So you can take it out on Dec 31, and the TFSA room will reset on Jan 1 next year.<\/p>\n\n\n\n<p>Another choice will be using a home equity line of credit.&nbsp; The interest rate will be similar to an RRSP loan. and it\u2019s interest only, so it will not take away too much of your TDSR.<\/p>\n\n\n\n<p>But for sure you need to have a property in the beginning.<\/p>\n\n\n\n<p>Or you can consider a leverage loan which I\u2019ve covered in this previous <a href=\"https:\/\/www.youtube.com\/watch?v=UoUqfaH_s8M?sub_confirmation=1\">video<\/a>.&nbsp;<\/p>\n\n\n\n<p>Either way, before you proceed, talk to a professional to make sure you are fit with the strategy. You can <a href=\"mailto:thomaschan@novellawealth.com\">book a time with me<\/a> for a complimentary consult and I can better assess your specific situation.\u00a0<\/p>\n\n\n\n<p><strong>Final thoughts<\/strong><\/p>\n\n\n\n<p>Please understand that an RRSP loan can still be a good idea in some cases.&nbsp;<\/p>\n\n\n\n<p>But before you take the loan, ask yourself:&nbsp;<\/p>\n\n\n\n<ol><li>Why are you doing an RRSP loan?&nbsp;<\/li><li>Is it to get more tax refund? Or are you simply seeking an investment opportunity?<\/li><li>Are you playing top-up or catch up?&nbsp;<\/li><li>And finally, what\u2019s your overall savings strategy?<\/li><\/ol>\n\n\n\n<p>Be aware that especially during RRSP season, banks are playing to our needs of instant gratification with their well-timed RRSP marketing. But an RRSP loan isn\u2019t necessary if repaying a loan doesn\u2019t fit into your financial plan, or if you already have the discipline to make regular contributions to your RRSP throughout the year.<\/p>\n\n\n\n<p>I\u2019d like to hear from you &#8211; do you have any experience with RRSP loans?\u00a0How was it for you?<\/p>\n\n\n\n<p>If you want to keep learning about growing your financial wealth in Canada, subscribe to my <a href=\"https:\/\/www.youtube.com\/c\/ThomasCChan?sub_confirmation=1\" target=\"_blank\" rel=\"noreferrer noopener\">YouTube channel<\/a> and let me know below what topics or questions you have. Need a financial consult? <a href=\"mailto:thomaschan@novellawealth.com\">Book a complimentary time<\/a> with me and I\u2019d be happy to help you out.\u00a0<\/p>\n\n\n","protected":false},"excerpt":{"rendered":"<p>RRSP loan<\/p>\n","protected":false},"author":2,"featured_media":1094,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":""},"categories":[11],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v16.1.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Should you consider getting an RRSP loan? | Thomas Chan<\/title>\n<meta name=\"description\" content=\"In this blog, I\u2019m going to cover what is an RRSP loan, how does an RRSP loan work, the pros &amp; cons of a RRSP loan and is it a good idea to borrow money for RRSP. Did you know 8 out of 10 times, we could be doing the RRSP loan wrong? 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