When it comes to saving for your retirement, time is money. But the costly realities of life, such as therise of inflation, credit card debt, or having to juggle payments forthe mortgage of a new home or student loan, might have put your retirement savings plans on pause. Do you have plenty of contribution room but lack the funds to beef up your RRSP? The answer is simple – play catch-up on your contributions with the help of an RRSP loan.
What is an RRSP Loan?
As the name suggests, an RRSP loan allows you to borrow funds to contribute to your RRSP, even if you are short on cash. Whether you don’t have the financial means tomake large RRSP contributions orhave only just started planning for retirement, an RRSP loan could help enhance your retirement savings power. With the help of RRSP loans, Canadians will have more opportunities to meet their full annual RRSP contribution and watch as their money grows,putting themselves on the road toward a financially sound retirement.
There are two types of RRSP loans available:
- Short-term RRSP Loans are loans thatallow you to meet your RRSP contribution limit for the year, with repayment terms usually being one year.
- Long-term RRSP Loans offer a larger amount for those wishing to catch up on RRSP contribution room with longer repayment terms typically ranging from 5-10 years.
How to qualify for an RRSP Loan?
While each financial lender will differ slightly in their eligibility requirements for RRSP loans, typically, to qualify for an RRSP loan,Canadians’financial worthiness will be measured by their credit score, income, and existing debt.To get your hands on an RRSP loan, you’ll need to ensure that your credit score is in good standing. According to Equifax and Transunion – Canada’s leading credit reporting bureaus – a good credit scoreranges between 660 to 724.Along with your credit score, if you have a reliable income and minimal debt, you might qualify for an RRSP loan and get the funds to put you on track for your ideal retirement future. Speak with a financial advisor at your local credit union to get a better understanding of their RRSP loan requirements and offerings.
What is the maximum you can borrow with an RRSP loan?
Many financial institutions can provide you with an RRSP loan of up to $50,000. Depending on your income, debt level, and credit score, you could receive as little as $5,000 to up to $50,000 to help youcontribute to your RRSP.
What are the benefits of the RRSP loan?
Are you a little late in starting to contribute to your RRSP,or have you notmade your maximum contribution in years? An RRSP loan can help you reach your full retirement savings potential. The beauty of an RRSP loan is twofold.By taking out an RRSP loan, you’ll be able to reduce yourtaxable income and take advantage of unused contribution room from previous years.Plus, by reducing your taxable income, you’ll increase the size of your tax refund, which means more money back in your pocket to help you repay your RRSP loan.
Haven’t contributed to your RRSP in the last 10 years and are worried you don’t have the time to make up the contributions? Have no fear!RRSP contribution room never expires, so even if you don’t contribute for 10 years, the unused contribution room accumulated from previous years will still be available to use going forward. Simply put,this means you have even more chances to increase your contributions to your RRSP, which you might not have otherwise been able to do without the loan.
Drawbacks of an RRSP Loan
Before taking out a loan to contribute to your RRSP, it’s important to consider the full financial picture.Like any other loan or credit card bill, an RRSP loan is just that, a loan. This means you’ll be adding another monthly payment to your financial plate. So, if youcurrently have lean financial means, before biting off more than you can chew, remember to evaluate your current financial standing to assess if you can manage additional debt without putting a crunch on your cash flow.Plus, while RRSP loans come withlower interest payments than other loans, remember that you’re still paying an additional cost for the privilege of borrowing cash from your financial institution.
Is an RRSP loan right for you?
An RRSP loan can be a great savings tool for Canadians to maximize their RRSP contribution – but it’s not the right solution foreveryone. Before pulling the trigger on an RRSP loan, it’s important to consider the complete financial picture. If you are a high-income earner straddling the line between two tax brackets andare able to manage the monthly payments and interest, the RRSP loan might be right for you.However, if you are experiencing financial tightness in your wallet, adding another expenseto your plate might not be the best option. That’s because if you can’t keep up with the payments towards your loan, you not only default on the loan but lower your credit score, which will impede your ability to get approved for a loan in the future. So, if making repayments towards an RRSP loan is a tall task for you,rather than taking on more debt, consider making regular contributions to your RRSP instead. Speak with a financial advisor at your local credit union to determine if an RRSP loan is right for you.
Enhance your retirement savings strategy with the help of a credit union
Credit unions are a great financial option to help you achieve a financially secure retirement. Not yet a credit union member? Find your nearest credit union here.