3 RRSP loan strategies

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RRSP season ends tomorrow but it’s still not too late to get a loan to fund your retirement.

Here are three strategies you can use:

#1: Gross-up strategy

You can borrow an extra amount to gross up your contribution. Let’s assume you live in Alberta and make $55,000 annually. You decide you’re going to contribute $3,500. But if you borrow $1,500, you’ll have a total contribution of $5,000 (an increase of 42.9%) and get a refund of $1,525.

You can then use the refund to pay off the loan and only be charged a small amount of interest.

#2: Top-up strategy

With this strategy, you can borrow a lot more but the refund won’t pay off the loan right away. Instead of contributing $3,500 and borrowing an additional $1,500, you decide to borrow three times as much ($4,500). Now your total contribution will be $8,000 (128.6% more than $3,500).

Your refund will be $2,440, which can be used to pay off the majority of your loan. After that, your loan balance will be just $2,060.

#3: Catch-up strategy

The catch-up strategy involves going deeper into debt. Instead of contributing $3,500 and borrowing $4,500, you decide to borrow twice as much ($9,000). Your total contribution is now $12,500 (257.1% more than $3,500).

If you use your refund of $3,625 to pay down your loan, you’ll still owe $5,375. The total interest you pay will be higher than the gross-up and top-up strategies, but you’ll have a lot more in your RRSP.

The bottom line

There are pros and cons of RRSP loans. The advantages are that you build up your retirement savings quickly and use the refund to pay down your loan. The disadvantages are that you’ll have to pay interest and you can’t write off the interest on the loan. But sometimes using the right strategy can help you save more for retirement.

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