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The excitement around the RRSP season has dulled in recent years. With the introduction of the Tax-free Savings Account (TFSA), the RRSP has lost some of its charms. However, it is still an appealing option for many and continues to make sense in 2021 as well. But what about RRSP loans?
RRSP loans have been initiated with the idea of maximizing your retirement savings. The more you can put away and the earlier you do it, the better it is for your retirement. It is important to open an RRSP and equally important to make sure you are getting the most out of your RRSP. This is where RRSP loans and making smart RRSP withdrawals come into play.
An RRSP loan is a useful way to ensure that you are maximizing your RRSP contributions. An RRSP loan gives you the funds you need to meet the full annual RRSP contribution amount of 18% or top up your unused contributions from previous years.
For instance, if you deposited $4,000 last year but could have deposited $15,000, an $11,000 personal loan would allow you to take full advantage of your annual contribution room. Additionally, if you deposited a total of $4,000 for the last two years, a $26,000 loan will help make up the difference.
RRSP loans are usually at bank prime – currently at 3.95%. Most banks lend up to $50,000 with an amortization, or repayment period, of one to 10 years. The first payment is usually deferred by 90 days so that an RRSP loan is taken in February before the RRSP deadline can generate a tax refund in April. So, you can use it to pay down some of the loans.
If you need the withdraw, in any case, from your RRSP account, you can do so. However, keep in mind that you will be taxed on the amount you withdraw. You can avoid this tax in two cases; either you are buying your first home and borrowing from your RRSP to further your education.
There is a Home Buyer’s Plan (HBP), under which you can buy your first home and take out $35,000 of your RRSP. To know, whether your home meets the necessary requirements, check the CRA website.
You can withdraw money from your RRSP to pay for your education under the Lifelong Learning Plan (LLP). However, keep in mind that withdrawn proceeds under the LLP can only be applied to your own education costs or that of your spouse or law partner. Funding your child’s education is not allowed with these funds.
If you choose to withdraw the money from your RRSP under the HBP, you have to repay it within 15 years. Usually, you have to repay 1/15 of the total amount you withdrew for each year. The repayment period starts the second year following the year you make your withdrawal. If you withdraw money without the above-mentioned reasons, then you will face penalties in the form of additional taxes.
Once you know what an RRSP loan is and what is RRSP withdrawal, it’s time to check whether an RRSP loan is worth it or not.
Is RRSP Loan Worth It?
To know whether an RRSP loan is for you or not, answer the below 4 questions.
1. What is the Cost Vs Benefit?
If the rate of return on your Registered Retirement Savings Plans (RRSP) is expected to be higher than the interest rate on your loan, borrowing to invest could put you ahead. However, if your RRSP rate of return is less than your loan rate, an RRSP is not the best option for you.
2. What is Your Income Tax Rate?
If your current tax rate is higher but you expect it to be low in the future, then it makes more sense to borrow to invest in an RRSP. If the income tax rate is high and will continue to be so, then it will be unwise to invest in an RRSP.
3. Are You a Savvy Saver?
If you find it hard to save, borrowing is a good solution to ensure you make your RRSP contributions. However, if you have enough savings in your bank account, then borrowing money won’t do any good.
4. Are Your Okay With Some Risk?
Taking a loan is not an easy decision. You might already know that when you take a loan, especially from private lenders, you have to repay the loans at higher interest. Additionally, in RRSP, there is risk involved as you will have to pay the loan’s principal and interest even if the value of your investment goes down.
These four questions are the perfect parameter to know whether RRSP is right for you or not. Once you made your decision, your next question will be: does RRSP hurt my credit score? Let’s find it out.
Will RRSP Affect My Credit Score?
RRSP is an investment account and investment accounts are intended to help individuals build their personal savings. There are tax implications when you move money out of these savings plans. However, it is important to know that these activities are not reported to the credit bureaus. Thus, even if you move your money out of these savings accounts, your credit score won’t be hurt.
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The Bottom Line
With an RRSP account, you cannot take out the money as there are strict rules. You might face tax penalties if you try to do so. When you cash out, you will have to pay income tax. However, you can claim a tax deduction in the year you make a contribution or carry it forward to future years. In RRSP, you can choose your own investments. Finally, there is tax-sheltered growth on investments in the RRSP plan. With the above traits, you can decide whether it is worthwhile for you or not.
At Lionsgate, we specialize in helping people obtain funding private mortgages for land purchases as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, leave us a message and we will try to connect you with local realtors and sourcing for financing.