In Canada where taxes can almost be 50% of your taxable income, saving taxes should always be a priority of any financial plan. There is no doubt that registered retirement savings plans (RRSPs) form part of a majority of Canadians’ retirement savings.

According to Statistics Canada, tax payers have substantial unused RRSP contribution room be carried forward. It’s clear that we aren’t taking advantage of this valuable asset to reduce our taxable income and pay ourselves first.

Depending on your situation, you’re better off borrowing to make your RRSP contribution if the alternative isn’t making a contribution at all. The money you borrow to invest into your plan now will be growing tax sheltered till your retirement. That tax free growth will outweigh any interest charges. The downfall is you can’t claim the interest expense as a tax deduction in most cases.

Whether borrowing to purchase an RRSP makes sense for you depends on several factors: the interest rate and term of the loan, the rate of return inside your RRSP and the number of years until you begin making withdrawals from your RRSP. Of course borrowing to purchase an RRSP makes most sense when you have considerable time before retirement, but that’s when you can usually least afford it. Most financial institutions provide RRSP loans a very favorable rates of interest over variable terms depending on how much you are borrowing to reinvest with them.

If you are intending to start a monthly contribution to a registered plan a loan can make more sense. If you were to start making monthly contributions of $400 per month and you can afford a $400 per month loan payment, it makes sense to borrow $4,800. The immediate compounding tax-free growth should always outweigh the additional interest charges over the long term.

If you think borrowing for your RRSP contribution might be for you, be sure to talk to your financial advisor for more information.

February 20, 2008