Should I Consider An RRSP Loan? (2024)

FAQs

Does an RRSP loan affect credit score? ›

“Don't let the carrot blind you to the fact that you will have repayments to make,” she said. Gray said investors also need to remember that an RRSP loan is adding debt and it could impact your credit score and affect other borrowing.

There is less freedom in how you can withdraw from an RRSP, compared to a TFSA. Withdrawals are classed as taxable income (unlike TFSA withdrawals). Low-income earners pay a low rate of income tax, so RRSPs don't make financial sense for this kind of investor (a TFSA would probably be a better option).

With an RRSP loan, you borrow a set amount that goes directly into your RRSP. You pay it back, with interest, within a set time frame. With an RRSP line of credit you get access to a set amount of money and any money you borrow goes directly into your RRSP.

An RRSP gives you a tax break and lets you accumulate returns on investments tax-free. And paying down debt means you save on interest payments, which can become quite hefty. It also gives you a financial cushion if you or another family member gets hit with an unforeseen problem, like an illness or losing a job.

An RRSP can be considered the Canadian equivalent of the American 401(k), and vice versa. Both are retirement plans designed to encourage savings with similar tax benefits.

For those whose employment prospects are more challenging, and who expect their 2020 income to be much lower than previous years, if they have RRSPs, making a withdrawal is often preferable over relying on lines of credit or credit cards. The lower the tax bracket, the stronger the argument is for using RRSPs.

Making an RRSP contribution can potentially reduce the amount of tax you will be subject to pay on your income tax return. The way an RRSP works is that it helps you save for the future while deferring tax. The amount you contribute to your RRSP is deducted from your taxable income in the year of the contribution.

Contributions can be deducted from taxable income when filing your tax return, meaning you can end up paying less taxes and saving more money. You may get anywhere from 20 per cent to 50 per cent of your RRSP contributions back as an income tax refund based on your marginal tax rate.

Borrow between $1,000 to $50,000 at a low interest rate to top up your RRSPs, with payments spread out over periods of up to 10 years.

Is a RSP line of credit worth it? ›

So, for an RRSP loan to be worth it, your investments need to outpace the interest rate you're paying the loan. Rates of return on RRSPs can vary among investments and investment styles. So, if you're paying 3.25% interest for the loan, but your investments produce more than that, you'll come out ahead.

A line of credit gives you ongoing access to funds that you can use and re-use as needed. You're charged interest only on the amount you use. A line of credit is ideal when your cash needs can increase suddenly, such as with home renovations or education.

Investment accounts such as RRSPs, RESPs, TFSAs and RDSPs are intended to help individuals build their personal savings. Although there may be tax implications when you move money out of these savings plans, these activities are not reported to the credit bureaus and therefore will not affect your credit scores.

With a TFSA, you can withdraw money any time, tax-free! Withdrawn Amounts - When withdrawing funds from an RRSP, your contribution room is lost for amounts you withdraw subject to certain exceptions. For a TFSA, withdrawn amounts are added back to your contribution room in the following year.

A personal loan will cause a slight hit to your credit score in the short term, but making on-time payments will bring it back up and can help improve your credit in the long run. A personal loan calculator can be a big help when it comes to determining the loan repayment term that's right for you.

You may also find it comforting to know that being denied a loan won't hurt your credit for the worse. A loan denial won't show up on your credit report, says Experian.

In some cases, you may be able use money in your RRSP as collateral for a bank loan. This may not be allowed depending on your bank policy or RRSP administration agreement. Make sure you get expert advice from a tax planner or financial advisor before you go ahead. If you don't follow the rules, you'll have to pay tax.

A home loan redraw facility can get you cash, fast. No obligation. It wont affect your credit score.