What can you do if the RRSP (Registered Retirement Savings Plan) deadline is fast approaching and you do not have the money to make a contribution? You can try and borrow it.

Your RRSP contribution is an important part of ensuring a secure financial future. While it is preferable to use existing savings to contribute to an RRSP, if you are strapped for cash, it may be better to borrow than to not make a contribution at all. If you skip just one $5,000 contribution, you could reduce the value of your RRSP by almost $17,000 over 25 years, assuming a 5% average rate of return.

Putting off your RRSP contribution can impact your future cash flow and your retirement lifestyle. For starters, foregoing your RRSP contribution could reduce the tax refund you receive. It could also impede your ability to build a comfortable tax-sheltered retirement portfolio. Finally, it is more difficult to save thousands of extra dollars to top up your RRSP years down the road – using the carry forward provision – than it is to make regular RRSP contributions now.

Even if money is tight, borrowing to make an RRSP contribution may make financial sense – provided you pay down the loan quickly. Keep in mind that interest on RRSP loans is not tax deductible. However, RRSPs have enough tax advantages to make carrying short-term debt worthwhile. Not only will you receive an immediate tax deduction for your contribution, but your RRSP investment compounds on a tax-deferred basis for as long as it remains in the plan. In most cases, the immediate tax savings, plus the tax-deferred growth inside a RRSP will far outweigh the short-term interest costs of the loan.

You can use any tax refund you get on your 2009 taxes to help pay off your RRSP loan or to make an early contribution for the 2010 tax year. In certain circumstances, it may be prudent to pay off higher interest-bearing debts, such as an outstanding credit card balance, before you pay down your loan.

Call us today to make an appointment to discuss your RRSP loan options.

We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters.

January, 2010