Should I borrow for an RRSP ?

The deadline for 2012 RRSP deposits is Feb. 29. It’s not uncommon for your bank to suggest an RRSP loan to reduce your taxes and get a leg up on meeting your retirement savings goals, pay back the loan,

If you have no retirement plan at your place of employment or pension, it will be noted that this is an additional incentive for maxing out your RRSP contributions annually.

Something to note though, your bank benefits two ways when handing out an RRSP loan. Your bank profits from the interest on the transaction as well as the fees from the funds you direct the money towards. That’s why you’ll be surrounded by commercials and advertising promoting the RRSP loan in the weeks leading up to the deadline.

A loan for an RRSP may appear like a sound idea. But you need to ask yourself, can you handle the additional debt?

Here are some considerations.

• The interest on the RRSP loan isn’t tax-deductible.

• Your investment return you put your RRSP money must be higher than the interest on the money you borrowed for it to make sense.

• And speaking of interest rates and rates of return, they haven’t been very impressive internationally. The broad stock market returns in 2011 averaged some pretty unimpressive results. And if you were to have invested, let’s say 40,000 dollars into Canadian mutual funds last year, on average your investment would have lost around $5,000 not including fees as many funds underperformed. And you still have to pay back the loan you took out plus the interest.

• Your debt load. You may already have a mortgage or certainly rent. On top of that you likely have other debt considerations. If you are putting disposable income towards paying down a lower interest RRSP loan, instead of higher interest lines of credit, or even credit card debt, you’ll find the interest charges will negate the benefits.

• Are you paying income taxes? If your financial position in 2011 was such that you won’t actually be paying income tax this year, it makes more sense to carry your contribution allowance through to another year and pay down your current debts.

In some cases an RRSP loan does make sense, but way both sides of the coin first and talk to an independent, unbiased advisor before taking the plunge. The best way is forced savings, but’s another story for another day.

For more tips you can go to PrudentFinancial.net