Should you borrow money to invest in your RRSP?

If saving for retirement is a priority, here are a few things to keep in mind before you take out a loan

Danielle Arbuckle,

Originally published in Today's Parent March 2012

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Image: Raymond Biesinger

So you haven’t saved a cent for retirement since your first child was born. You know the deadline for 2011 tax year contributions is February 29 – but finding the money is a constant struggle. You feel your RRSPs are falling farther and farther behind, and you’re looking for alternatives.

Is borrowing to invest in your RRSP a good idea? For some families it can be. Chances are good that the contribution will earn you a tax refund large enough to cover the interest on your loan and make a big dent in the principal. Plus, the money you invest inside your RRSP will grow tax-free until you retire. Still, Rosanna de Jong, a manager of Financial Planning with RBC Financial in Edmonton, Alta., advises families to think carefully before borrowing to invest. “Every situation is different,” she says. To help make your decision, she recommends getting advice from a financial planner to sort through your family’s financial goals. (You can consult with one through your bank for free.) If you’re young and using a lot of your household income to cover daycare costs, for example, perhaps you’ll decide those RRSP contributions can wait a few more years.

Consider borrowing if:

Interest rates are low – as they are right now. You don’t want to pay more interest on your loan than you’ll earn on your investments. Whether you plan to take out a line of credit, a basic personal loan or a loan specifically designed for catching up on RRSP contributions, shop around for the best rates.
Your tax refund will pay down all the interest and a chunk of the principal on your loan.
You can pay off your loan within a year. Otherwise, interest will add up and you may not come out ahead.

Find out when it's not a good idea to borrow for your RRSP contribution. Read on to learn more>

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