Are you thinking about borrowing money to invest in an RRSP? That’s the basic idea behind getting a Registered Retirement Savings Plan (RRSP) line of credit (at Scotiabank we call it a Scotia RSP Catch-Up ® Line of Credit).
Some Canadians take out a RRSP line of credit to make a contribution ahead of the yearly RRSP deadline, which can potentially give them tax savings when they get their tax return.
If you save regularly towards a RRSP contribution, this sort of line of credit might not be something you’d consider. One way we recommend creating RRSP savings habits is by setting up pre-authorized contributions from your bank account on a recurring basis (like once a month or every other week) into a RRSP, so that you keep putting money away automatically towards your future.
If you aren’t in a habit of doing this sort of regular saving – an option that you might want to consider is using a RRSP line of credit to catch up on RRSP contributions you wanted to make, but didn’t get around to.
How does an RRSP Line of Credit work?
An RRSP Line of Credit works like other types of lines of credit – you borrow a set amount of money and then need to make principal and interest repayments over a period of time. The main difference with the RRSP line of credit and other credit options is that the money you borrow goes directly into your RRSP account.
Each lender’s line of credit may work a bit differently. Before you apply for this sort of line of credit, ask your financial advisor questions like:
• What is the interest rate?
• Is it something that will work for my finances?
• How flexible are the payment terms?
• When do I need to start paying the amount I borrowed back and how much do I need to pay at that time?
• Can I defer payments? And if so, how and how much? Does interest still apply if I defer a payment?
If you are able to defer your first payment and take out the RRSP line of credit, for example in February, you might have enough time to file your taxes, claim the RRSP contribution, get your tax refund and use some or all of that refund towards paying off the line of credit.
Why might you want to get a RRSP Line of Credit?
Getting a RRSP Line of Credit can help you get a head start on your RRSP savings. The money that you contribute to your RRSP (up to your yearly limit set by the Canada Revenue Agency) can be deducted from your earned income, which may help lower the amount of income tax you pay that year.
This sort of line of credit helps you maximize your annual RRSP contributions (which you build throughout your working life).1
Here are a few situations where an RRSP line of credit might work for your financial needs.
You need pressure to change your savings habits.
Some people use RRSP lines of credit to force themselves into the habit of putting money away and saving for retirement. If they get this type of loan, they are strongly committed to both saving for retirement with the RRSP contribution and paying off their line of credit used to borrow for that contribution on a regular basis.
Paying back the RRSP line of credit won’t throw off your budget.
Life means unexpected expenses can pop up. You want to be able to afford monthly payments on your RRSP line of credit without straining your budget. If you are able to make your budget work to contribute to your RRSP as well as RRSP line of credit payments each month on time, you likely won’t need an RRSP line of credit next year.
You're only using a line of credit over the short-term.
Ideally, you want to be able to pay off lines of credit quickly, ideally in less than six months. That minimizes the interest you'll have to pay.
Use your RRSP line of credit to help you make RRSP contributions on a short-term basis when you may not have saved enough in any one year.
So is this the right investment option for you?
Before applying for a RRSP line of credit, it’s important to make sure this option fits into your financial plans and that you can manage the debt (check the interest rate on the line of credit).
Talk to your financial or tax advisor if you think this is something that could work for you and your retirement saving and investment needs.
Make sure to look at your annual notice of assessment from the Canada Revenue Service to check your contribution room and/or speak to a financial or tax advisor.