Borrowing Money to Save for Retirement: Should you do it?
Why You shouldn’t borrow for your RRSP?
Saving for retirement is important and the sooner you start, the more money you’ll have when you retire. Putting money into an RRSP is a great idea, but what if you don’t have the money to do so by the RRSP deadline? One option is to borrow the money so that you can contribute while there’s still time. Many banks push this option near the RRSP deadline. But is it a smart move?
It’s important to note that, if you borrow money to invest in an RRSP, you’ll be charged interest on the loan and possibly even a fee for taking out the loan. These charges will offset the tax savings you get for putting money into an RRSP account. Depending on how much you put in, you could end up paying a large amount in interest and seriously eating into your tax savings.
If you borrow money one year, you’ll have to pay it back. That likely means that you won’t be able to save enough to contribute to your RRSP the next year, which means you’ll need to borrow money once again. This cycle can continue for a while and it isn’t the best route to head down.
Finding Money to Contribute to your RRSP
If you find yourself struggling to find money to contribute to your RRSP, there are a number of things that you can do to help yourself out.
One reason that many people aren’t able to contribute to their RRSPs is that they’re spending money paying for car loans, credit card balances, lines of credit and other debts. With these other debts, it doesn’t make sense to borrow money to put into your RRSP. You should instead work on paying these debts off instead. Once you’ve paid the other debts off, you can use the money that you previously spent on debt repayment to contribute to your RRSP.
Having a plan and making regular contributions to your RRSP is often a better strategy than paying in one lump sum. It makes it easier to invest if the money automatically comes out of your account with each paycheque.
If you’re short on cash because you have money tied up in a trading account, you may want to consider transferring these funds into your RRSP. You will end up paying tax if you’ve made a profit on your investment, but it will be at least partially offset by the RRSP tax break.
To learn more about RRSP benefits click here.
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