Should you take an RRSP loan? Five key questions to consider.

Five questions to consider before this year's RRSP contribution deadline

Pictured above: Amber Frisky, Vision Credit Union, Consort

This year’s RRSP contribution deadlines are on the horizon — it’s February 29, by the way — which means it’s time to decide whether to invest in an RRSP for the tax benefits. RRSP contributions can help take a bite out of your taxes. If you’re lucky, they can even net you a tax refund. But what if you don’t have the savings to make a contribution? Should you borrow? Here are some questions to consider before deciding.

1. What is the interest rate on the loan?

Consider how the loan interest rate will impact your payments. In a low interest rate environment — like we have now — loan interest will have less impact. If interests are high when you borrow or if you have a variable loan and they increase over the term of the loan, the interest charges can offset the initial benefit you receive from making the RRSP contribution.

2. How are your RRSP funds invested?

You can place your RRSPs in a variety of qualified investments that provide varying levels of risk. Financial analysts recommend being conservative with borrowed RRSP contributions, (such as an RRSP investment that guarantees your principal) so that you're not putting a borrowed asset into a high-risk investment. If your RRSP portfolio is high risk, borrowing to contribute may not be the right move.

3 . Can you afford to pay back the loan ?

Sometimes, taking a loan for an RRSP can result in a tax refund that covers the amount of the loan. If that’s the case, you’re in luck. If not, consider if you can you afford to make the loan payments on time and to pay the loan back within the year. If you can’t afford to pay the loan back before the next tax season, it probably doesn’t make sense to add more to your overall debt load.

4 . What is your current level of debt ?

Are you currently juggling high-interest debt? If you’re already paying high interest on credit card debts, for example, your first order of business should be paying off this debt — not taking on more debt. If you don’t pay off the loan as scheduled, the cost of the interest accrued can outweigh the tax benefits.

5. Is an RRSP contribution beneficial in your tax bracket?

Talk to your financial advisor about the tax benefits of RRSPs for your income level. For people whose annual earnings fall into lower tax brackets, the tax benefits of an RRSP contribution may be limited.