The Value of an RSP Loan
We all want to save money. But after the mortgage, car loan, groceries, and daycare expenses, your savings account is often left neglected. But have you considered an RSP loan?
An RSP loan is money you borrow from the bank that you funnel directly into your RSP.
It’s meant to help max out your RSP contributions for the year if you don’t have the funds available to do that. This money will not be taxed until you take it out of your RSP, which will hopefully be when you retire and in a lower tax bracket.
In 2020, the maximum RSP contribution you can make is 18% of your 2019 earned income, up to $27,230.
Borrowing money to save money
It seems like a strange proposition, but if you do the math, it actually makes a whole lot of sense. Take a look at this hypothetical example — keep in mind that actual amounts in question will depend on current interest and tax rates. But for the sake of illustration…
Let’s say you live in British Columbia and earn an annual salary of $90,000. Assuming you make no deductions, you’ll pay $13,295 in federal income tax and $5,373 in provincial income tax. But if you maxed out your RRSP contribution limit at 18% of your income, you’d only be taxed on $73,800, which would lower your federal tax bill to $9,975 and your provincial sales tax bill to $3,885. This would leave you with a tax refund of $4,808, which you can put directly towards the loan.
If you borrowed your maximum contribution amount on a $90,000 salary ($16,200), your $4,808 refund would be 29% of the loan paid off in one shot. So then you’d have just $11,392 in principal to pay back. And if you were paying today’s prime interest rate of 5.50% on that loan, you’d owe a total of $12,018.56. Amortized over 36 months equals $333.85 a month for an extra $16,200-plus waiting for you when you retire. We say plus because in an ideal world, the money is invested well and growing.
An RSP Loan prioritizes your savings goals
The beauty of an RSP loan is that it commits you to putting money away for your future every month — you have to make the monthly payments on the loan or face penalties. But the upside is that you’ll have already reaped the benefits because the lump sum is already in your RSP and getting bigger every year. For those of us who have a hard time committing to putting money away regularly, an RSP loan can be a great solution.
Make life easier with automatic deductions
The challenge of saving money is that we often end up splurging on something with our potential savings and then think “oh-I’ll-save-more-next-month”. This is a tricky pattern to get out of. But what an RSP loan can help with is getting you in the habit of putting the money away. One of the easiest ways to do this is by setting up automatic deductions that go straight to your loan. You can easily set it up so as soon as your paycheque is deposited that your $333.85, or whatever your loan payment is, is automatically deducted so you don’t even have to think about saving. It’s done for you.
Where to get an RSP loan
We offer RSP loans that can fit your goals. Get in touch with one of our advisors to find out how you can take advantage of the benefits of this unique kind of lending.
The head start you’ve been looking for
We all have goals but sometimes starting is the hardest part. Speak to us about RSP loans and find out if it is the right fit for you — it could just be that head start on savings you’ve been looking for!
Contact us for more information about RSP loans and lending options in general.