Borrowing to invest in your RRSP

If you’re like many Canadians, you’re saving and investing money for the future and are planning (or at least hoping) for a comfortable retirement.

One of the tools the government offers to help save for your retirement is the Registered Retirement Savings Plan (RRSP). Contributions to your RRSP are tax deductible, meaning that they could reduce your taxes payable (and possibly lead to you getting a tax refund).

The amount you’re permitted to contribute to your RRSP at any given time is referred to as your RRSP contribution limit. Your RRSP contribution limit for a particular year is calculated as 18% of your income from the previous year, up to a maximum each year as defined by the Canadian Revenue Agency (CRA). Any contribution room you don’t use in one year will roll over to the next year and be added to your total RRSP contribution limit.

You can access your profile at the CRA website to view your available RRSP contribution room here.

The opportunity of borrowing to invest in your RRSP

If you have unused RRSP contribution room in your RRSP (contribution room you earned based on your income, but haven’t yet used to contribute to your RRSP), you can use that room whenever you choose. If you have more contribution room available than you do funds to invest, one option is borrowing additional funds to invest in your RRSP.

Borrowing funds to invest in your RRSP can be a quick and easy way to make use of RRSP contribution room, increase the size of your RRSP, and save for your retirement, especially in the following situations:

• When the additional RRSP contribution results in a substantial reduction in income tax owed (or a nice potential refund)
• When the anticipated tax deduction or refund is sufficient to pay off much of the borrowed funds
• When the rate of return you anticipate from the investment exceeds the interest rate on the borrowed funds
• When you anticipate being able to pay off the balance of borrowed funds before you pay a significant amount in interest charges

However, as with any investing strategy, borrowing to invest in your RRSP comes with risks as well. Changes to interest rates, changes to the rate or return on your investments, or a failure to pay off any borrowed funds in a timely manner can negatively impact your portfolio.

Using borrowed money to finance the purchase of securities involves greater risk than 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.