If you’re still young (or young at heart), then you might be pushing off thoughts of retirement to focus on other priorities. But the truth is, it’s never too early to start saving. If you’re looking to get the ball rolling or you simply want to max out your RRSP contribution room to save money on taxes, then it could make sense to take out a loan.
Find out more about what types of RRSP loans are available in Canada and learn more about how you stand to benefit from taking one out.
What is an RRSP loan?
An RRSP loan works just like any other loan: you borrow a lump sum of money that you’re required to pay back over a certain period of time. The main difference is that the money you borrow will go directly into your RRSP account rather than being used to pay off a large purchase (such as a house or vehicle). These loans are also typically shorter than regular loans and may come with lower interest rates.
Many Canadians take out RRSP loans strategically to save money on taxes. This is because any money you put into your retirement account before the RRSP deadline is deducted from your annual taxable income. With a lower income, you could qualify for a lower tax bracket and are more likely to get a much better return on your taxes.
For example, let’s say you make $50,000 for the year, with a 15% tax bracket for your first $45,000 and a 20% tax bracket on the last $5,000. If you put that $5,000 into an RRSP, you would be exempt from paying tax on it. This means you would earn back the 20% you paid on it, which would amount to a tax return of $1,000.
What types of RRSP loans can you get in Canada?
There are a couple of different types of RRSP loans on offer. The golden rule is to aim for the loan that will give you the lowest interest rates over time.
Secured loans. It may be possible to get approved for a larger loan with lower interest rates if you put up an asset (like your home or vehicle) to secure your loan payments.
Unsecured loans. Unsecured loans allow you to borrow money against your credit score instead of collateral, but your score will go down if you fail to make repayments.
Peer-to-peer loans. These loans offer an innovative and mostly online approach to lending. With peer-to-peer lending, you borrow money from private investors rather than institutions.
What is the limit for your RRSP contribution each year?
The maximum amount you can put into your RRSP varies year by year and is based on your income. The current RRSP contribution limit is 18% of the income you reported on your tax return last year, up to a maximum of $26,500. If you haven’t maxed out your contribution limit in previous years, you’ll also have what’s called “carry-forward” contribution room.
You can find out how much contribution room you have by looking at your Notice of Assessment from last year. You can also register for My Account with CRA to view your RRSP limit, track your refund, make updates to your return and monitor payments.
Strategize your RRSP loan to make the maximum contribution
If you want your RRSP loan to help you generate a tax savings without costing you more money in the long run, you should follow these basic steps.
Look for the lowest interest rates. Find an interest rate that sits below 5% if you want to generate a profit with your tax return.
Search for a short-term loan. Aim to pay off your loan in less than six months so that you don’t lose money on interest.
Avoid lenders that charge fees. Look for a lender that doesn’t bake hidden fees and charges into your contract.
Only borrow what you need. Borrow just enough money to maximize your RRSP contribution, and make sure you have the ability to repay what you borrow.
Pay off your loan with your tax return. Plan to use the tax return you get back to put a big dent in your loan payments.
What can I do if I over-contribute to my RRSP?
If you exceed your maximum RRSP contribution, you may be charged a penalty by the Canada Revenue Agency (usually for any contribution over $2,000). The money you put in also can’t be used to lower your taxable income and therefore won’t save you money on your tax return.
To figure out if you’ve over-contributed to your RRSP, you should check your CRA account or your Notice of Assessment. If you put too much money into your RRSP – don’t worry. There are a few measures you can take to correct the situation.
Get in touch with the CRA. Phone the CRA and ask how you can avoid a penalty. You may want to explain to them that you over-contributed by accident and would like some advice on next steps.
Remove excess funds. Withdraw the money you over-contributed and send a letter to the CRA along with a form showing the date you removed the excess funds.
Pay the penalty quickly. If you decide to pay the 1% tax on your over-contribution, you’ll need to fill out an Excess Contributions Form and send it in to the CRA. And be sure to act fast because if you don’t pay the tax in 90 days, it will go up to 6%.
What are the benefits of RRSP loans?
Maximize your income tax return. If you bring down your taxable income with your RRSP contribution, you could be eligible to get thousands back on your tax return.
Get into a lower tax bracket. You may be able to offset income charged at a higher tax rate by contributing to your RRSP.
Save more money for retirement. You’ll end up with a larger contribution to your RRSP in the end, which means you’ll have more to live on when you retire.
If you want to get a bigger tax return while contributing to your retirement savings, then you might like to consider an RRSP loan. Find out whether you’re eligible and compare lenders to get a loan that meets your needs.
Frequently asked questions
No. You can also put in stocks that you own outside of your RRSP. These types of contributions are called “in kind” contributions.
You can, but it might not be worthwhile. The main objective with an RRSP loan is to get a low interest rate. You may have trouble getting a low interest rate if you have bad credit. In this case, it’s probably best to skip the loan and set up an automatic payment plan for next year.
You’ll usually need to meet the following requirements:
Be 18 years old or the age of majority in your province or territory.
Be a Canadian citizen or a permanent resident with a valid Canadian address.
Have a working bank account (this is sometimes not a requirement – it varies between lenders).
Have proof of income.
Some lenders may also have additional criteria that you’ll need to meet in order to apply for a loan.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, along with an Associate's Degree in Science from Camosun College. Much of Claire's coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. She has also worked extensively in the field of "Blended Finance" with the Canadian government. In her spare time, Claire loves rock climbing, travelling and drinking inordinate amounts of coffee.
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