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Taking full advantage of RRSP contribution room

With interest rates at rock bottom and last year's market volatility seeming to be behind us, now might be the right time to consider borrowing to make up unused contribution room in Registered Retirement Savings Plans.

For the 2009 tax year, taxpayers can contribute up to 18% of the previous year's income (up to $21,000 maximum) into their RRSP. A member of a pension plan may have their contribution room reduced by the Pension Adjustment amount. But, unused contribution room has been carried forward since a rule change in 1990 so actual contribution room could be much higher than $21,000. Available contribution room can be found on the Notice of Assessment sent by the Canada Revenue Agency each spring after tax returns are filed.

If investors haven't been able to put the maximum in their RRSPs each year, borrowing to invest can provide an opportunity to make up thousands of missed contributions at today's very low interest rates.

Currently investors can get short term variable RRSP loans from many financial institutions with rates as low as prime plus .50%. With prime currently at 2.25%, a 2.75% loan can be very attractive option when you consider the higher long term growth potential of investing in a properly diversified portfolio.

The best way to get the most out of borrowing to invest in an RRSP is to use any resulting tax refund to pay off the loan as quickly as possible – thereby reducing the cost of the loan. Many lenders provide a 90-day payment deferral to allow tax refunds to be applied against the loan.

Borrowing to invest is not for everyone. With a variable rate, there is the risk costs may go up. And, despite the long term trends of the past, money invested in the stock market is not guaranteed to grow.

A financial advisor can help investors determine if borrowing to top up an RRSP is the right strategy for them, and if so, where they should be investing this catch-up contribution. Use our RRSP Loan Calculator to help you see how borrowing to invest could help your retirement plan.

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