What do you do if the RRSP deadline is fast approaching and you don’t have the money to make a contribution? Simple. Borrow it.
Your RRSP contribution is an important part of ensuring a secure financial future. While it’s preferable to use existing savings to contribute to an RRSP, if you’re strapped for cash it may be better to borrow than to not make a contribution at all. If you skip just one $5,000 contribution, you could reduce the value of your RRSP by almost $17,000 over 25 years assuming a 5% average rate of return.
Putting off your RRSP contribution can impact your future cash flow and your retirement lifestyle. For starters, forgoing your RRSP contribution could reduce the tax refund you receive. It could also impede your ability to build a comfortable tax-sheltered retirement portfolio. Finally, it’s more difficult to save thousands of extra dollars to top up your RRSP years down the road – using the carry forward provision – than it is to make regular RRSP contributions now.
Even if money is tight, borrowing to make an RRSP contribution may make good financial sense – provided you pay down the loan quickly.
Keep in mind that interest on RRSP loans is not tax deductible. However, RRSPs have enough tax advantages to make carrying short-term debt worthwhile. Not only will you receive an immediate tax deduction for your contribution, but your RRSP investment compounds on a tax-deferred basis for as long as it remains in the plan. In most cases the immediate tax saving, plus the tax-deferred growth inside an RRSP will far outweigh the short-term interest costs of the loan.
In addition, you can use any tax refund you get on your 2008 taxes to help pay off your RRSP loan or to make an early RRSP contribution for the 2009 tax year. However, it may be prudent to pay off higher interest-bearing debts, such as an outstanding credit card balance, before you pay down your loan.
This article is courtesy of Credential Asset Management Inc your credit union’s partner in providing you with wealth management services. ®Credential is a registered mark owned by Credential Financial Inc. and is used under license.
Mutual funds are offered through Credential Asset Management Inc. Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. The information contained in this newsletter is provided as a general source of information and should not be considered personal tax advice, investment advice or solicitation to buy or sell any mutual funds. ®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.