It's that time of year again when Canadian investors get a "friendly reminder" from their financial institutions that the RRSP deadline for the 2013 tax year is approaching (it's March 3, 2014 -- in case that email landed in your spam folder). Because saving for retirement is the responsible thing to do and paying less tax (RRSP contributions are deductible) always sounds great, you wouldn't be blamed for thinking that topping up your RRSP is a no-brainer. But is it? And is getting an investment loan a "good debt" to acquire in order to get it done? Here are some things to consider and speak about with your financial adviser:
Do you have the funds right now?
Ideally, you have the money already saved up and earmarked for retirement savings. If you do have money that you can safely and comfortably part with, the decision to top up your RRSPs is a little easier (although there are other factors to consider - more on that below). If you don't, you'll pay extra to borrow the money.
Should you get an investment loan?
While RRSP loans are hotly promoted and fat tax refunds are tempting, it's my opinion that you should never be casual about acquiring any debt. Debts cost you money, period. If you decide a loan is the way to go, shop around (terms and interest rates vary, so look for the best deal) and make it a priority to pay off the RRSP loan as soon as possible - the most obvious way to do that is with your tax refund. Here's another popular strategy to consider: work out your taxes ahead of time and determine the refund you're likely to get. Presuming you have contribution room, get an RRSP loan in the amount of your expected refund and top your contribution up with it. Immediately pay the loan off with your refund, thus paying the least amount of interest possible.
The best idea is to make monthly payments and avoid the loan altogether. If you 'pay your RRSP first' and automatically debit your account, you won't miss the money and it will have a whole year to accumulate and grow.
Do you have any debts or future expenses to consider?
Sometimes it's better to pay off a debt now (especially those with high interest rates) than to save for the future. Investor Education Fund has a free online pay down debt or invest calculator; try it out and see if the projected investment return is worth the interest you'd have to pay on your debt. If you have large upcoming expenses (like a move, renovation or car purchase), are you willing to take on the stress of being cash poor in exchange for a beefier RRSP contribution?
Are RRSPs the best options?
Just because it's RRSP season, doesn't mean RRSPs are the only kinds of investments you can consider right now. Tax Free Savings Accounts (TFSAs), for example, offer tax-free savings - you won't be taxed on the money when you take it out, like you would with an RRSP. If you think your income might not drop in retirement, this may be a better option for you.
In short, there's no straight answer of whether lump-sum RRSP contributions are "right" or "wrong" - it depends on your situation. Some additional advice: if you wish you had contributed to RRSPs this year and you don't like the idea of getting a loan, start manageable monthly, automatic contributions now, for next year. This relieves the pressure to scramble money together each time "RRSP season" comes around.
To learn more about what might be best for you, visit GetSmarterAboutMoney.ca or speak with a professional.
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