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An RRSP, or registered retirement savings plan, allows individuals, couples and groups to save for retirement. Recognized by the federal government of Canada, RRSPs help support financial independence when it is needed most. As receipted contributions to an RRSP are tax deductible, they enable you to enjoy tax savings on your current annual income while simultaneously saving and investing for your future.
RRSPs have an annual contribution deadline, however, so there may be times when you do not have the adequate available cash to make a contribution in time. This can mean having to forego the tax benefits you could have had.
What to do if you don’t have enough cash to make an RRSP contribution?
- a) Take out a loan
If you’re short of funds to contribute to your RRSP in time to meet the annual RRSP deadline, you can consider taking out a loan and contributing the sum to your RRSP. You can then use the resulting income tax refund to help repay the loan. Take care, however, to pay off the loan as soon as possible or the interest you’ll be charged on the loan may offset the potential savings.
- b) Contribute in kind
Another way to make up for a lack of funds is by contributing to your RRSP in kind. Certain financial institutions allow RRSP holders to contribute stocks and securities held outside of an RRSP. When you do this, the assets are transferred directly into your RRSP and you can claim an RRSP deduction equal to the fair market value of the investments.
However, transferring assets into your RRSP in kind has tax consequences. You will be considered to have sold the investments at fair market value and will have to report any resulting gain on your tax return (and capital losses will be denied). So, if you wish to maintain your RRSP savings, do a bit of research and consult with a financial advisor on the best option for your particular needs and goals.
When does taking out an RRSP catch-up loan make sense?
This depends on a number of factors. For instance, if an unforeseen expense has drained your finances and you see yourself missing out on your RRSP contributions in the coming months, you may want to borrow a sufficient amount to make the contributions in time.
The best way to make this decision is to consider the advantages of a loan. Will it bring the intended tax benefits? Could the interest payable on the loan offset the tax savings? Can you repay the loan on time? If not, what will be the financial repercussions? An RRSP catch-up loan may be worth considering if it offers a low-interest rate and you can put the resulting tax refund towards paying off the loan.
Use an online RRSP loan calculator to help you determine if taking out a loan to contribute to your RRSP would be a good idea and to find how much you need to borrow. It is also a good idea to seek the guidance of a professional advisor about whether it is a good idea based on your overall goals and financial profile.
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