According to data from Statistics Canada, the average yearly RRSP contribution is around $5000. Also only about 30% of eligible tax payers make a contribution. The contributions made only used up 6% of total available RRSP room. The data suggests that the majority of Canadians have accumulated vast amounts of RRSP contribution room. Only a small fraction of Canadians have used up all their contribution room and many would benefit by being able to boost their RRSP contributions.

There are several reasons for why many Canadians do not make use of their RRSP contributions even though they would love to do so. One of the reasons that some Canadians do not contribute to their RRSP is that they are busy paying down debts accumulated during the heady spending sprees of the holiday season of December and the New Year and so when the deadline of March 1 arrives, they find themselves short in money to contribute towards their retirement. Enter the RRSP loan option.

Though it is more financially sound to set up a voluntary monthly contribution of say $200- $300 a month towards your RRSP, there is also the choice of using the ‘forced’ monthly contribution using the good debt option of RRSP loans for your yearly contribution. I use the word good debt as this loan helps build up your net worth. These loans are available at rates as low as prime- 0.5% (as this article goes to print). Prime is currently at 3%. These loans also have the option of deferring payment up to 180 days, i.e if you avail of the loan today, your first payment does not come out until 180 days later, giving you enough time to arrange finances so as to make sure you have  the requisite funds to pay down the loan. Most people use the 60 day deferral plan. That is, the first payment to pay down the loan is done 60 days after the loan date.

Loan terms are available from 1 year to 10 years, but most people use the 2 year term which offers good affordability. As the loan term increases, the interest rate on the loan increases. Following is an illustration for a $5,000 (average contribution), 2 year loan.

Prime-0.5% (2.5%)                  $214                                        2 years

Prime (3%)                               $215                                        2 years

Prime +0.5%                            $216                                        2 years

Leave a Comment!

Or login with your MyBindi profile

Email

Password

forgot password?

Not registered? You can connect your existing Facebook or Twitter account above, or create a profile on MyBindi

Create Your Account