Should Glen, 45, with little savings and $100,000 remaining on his mortgage, borrow to invest in an RRSP?

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeFP AnswersPersonal FinanceShould Glen, 45, with little savings and $100,000 remaining on his mortgage, borrow to invest in an RRSP?FP Answers: The key is cash flow and whether he can comfortably repay the loan while paying off other debt such as a mortgageLast updated 0 minutes ago RRSP loan interest is not tax-deductible, which is why financial planners generally recommend repaying it within 12 months. Photo by Getty ImagesWe independently select everything we recommend. Buying through us may earn us a commission, which supports our work.Q. Is borrowing to invest in a registered retirement savings plan (RRSP) a good idea for me? I’m 45 years old and earn $110,000 annually. My wife works part time, earning about $32,000 annually. We have no pension and very little in savings. I also have $100,000 remaining on our mortgage which is at 4.3 per cent for two more years. The house is worth about $750,000 in Northern Ontario. —Thanks, GlenTHIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThis advertisement has not loaded yet, but your article continues below.FP Answers: Thanks for the question, Glen. Borrowing to invest in an RRSP could be worth exploring but it is not an automatic “yes.” The biggest issue is not just the tax refund from the RRSP contribution. It is whether your household can handle the loan comfortably while maintaining an emergency fund and staying on track with your mortgage and day-to-day cash flow. Before proceeding, it’s important to verify your available RRSP contribution room as shown on your Canada Revenue Agency (CRA) notice of assessment or on your MyCRA online account.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againAt your income level, the refund from an RRSP contribution can be meaningful. Income in your income range is taxed at a combined Federal-Ontario marginal rate of 43.41 per cent, so a $20,000 contribution could generate a refund of roughly $7,400. That is not extra money; it is money returned because you contributed. The real question is whether the loan cost and repayment plan still make sense once you take interest into account.RRSP loan interest is not tax-deductible, which is why financial planners generally recommend repaying it within 12 months. For example, on a $20,000 loan over 12 months, payments could run more than $1,700 a year, depending on the interest rate. If your cash flow can support that, the strategy has merit. If it creates strain, the risk outweighs the reward. The purpose of RRSP loans is a short-term catch-up tool rather than long-term financing. In short, repaying within about a year keeps the strategy low-cost, low-risk and clearly beneficial. Also note that borrowed money must be paid back regardless of how your investments perform. A short-term loan means you’re not holding borrowed money in volatile assets for many years, which reduces risk.This advertisement has not loaded yet, but your article continues below.Your wife’s income should be considered separately. At around $32,000, her marginal rate is considerably lower, making an RRSP deduction in her own name less valuable from a tax standpoint. A spousal RRSP, where you contribute in her name and claim the deduction at your higher rate, is likely more useful. Done correctly, it also sets up income-splitting in retirement, which can meaningfully reduce your combined tax burden later.Your 4.3 per cent mortgage rate is lower than a typical RRSP loan rate. As you near the end of a mortgage, nearly all of each payment goes to principal — so the interest-cost argument for accelerating mortgage paydown weakens considerably.A reasonable approach is this: Wait until your mortgage renews in two years. By then, your balance will be near zero and you can redirect those former mortgage payments toward RRSP contributions or a well-sized RRSP loan with a clear repayment runway. Your home’s value of approximately $750,000 provides a strong equity position, though drawing on home equity to invest in registered accounts carries its own risks and warrants professional advice.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Before you decide, consider:How much RRSP contribution room do you actually have?Do you have any emergency savings in place?Could you realistically repay an RRSP loan within 12 months?Would regular contributions be more manageable than borrowing?Are there other priorities, such as building a cash reserve?For a household with good income, minimal debt and no pension, a disciplined RRSP borrowing strategy can make sense, but only if the loan is modest, the repayment period is short and your cash flow is strong enough to support it. The key word here is “disciplined.” So borrow an amount you can repay within a year, apply the refund immediately against the loan and resist the urge to invest aggressively with borrowed money.With no workplace pension, the RRSP is your primary retirement vehicle. The cost of continuing to under-save through your peak earning years needs ongoing attention.That said, a fee-only financial planner should stress-test this idea against the alternatives — regular contributions, spousal RRSP use and mortgage prepayment — before you commit.Janet Gray is an advice-only certified financial planner with Money Coaches Canada in Ottawa.Do you have a question for FP Answers? Email wealth@postmedia.com.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.