Having trouble finding money for a contribution? You've probably heard about RRSP loans an as option. But if you're thinking about borrowing to invest to help catch up on your missed contributions, there are a few things to be aware of. It's RRSP time again, and you're trying to figure out how to find the money for this year's contribution. If you can't gather the money together from your own savings, you might consider a loan. RRSP loans are inexpensive this year. Interest rates are low. But if you're thinking about taking out one of those catch-up loans to make the contributions you've missed over the past few years, here are a few things to think about:

The Cost of Borrowing
It may be a good idea to borrow to make your RRSP contribution -- providing you can repay your loan within one year. Longer-term "catch-up" costs of borrowing, however, can be quite expensive. A $25,000 loan for 10 years at an average interest rate of six per cent would cost over $8,000 in interest over the life of the loan. It's true that the earlier you get your money into an RRSP, the better because of the impact of compounding - but remember your loan interest is not deductible. If your contribution results in a huge refund, consider using it to pay off the loan.

For instance, say you are in a 44% tax bracket and want to borrow $20,000 in order to eliminate your RRSP carry forward. Assuming that you intend to repay the loan over 10 years and pay 7.5% interest, your monthly loan payment is $237.40. By using the $8,800 tax refund (44% of $20,000) to pay down the principal (to $11,200) you can shorten the repayment period to four years and 10 months. At the end of that time you will have spent $13,621 to repay $11,200.

Meanwhile, the $20,000 in your RRSP, earning an attainable 8% (in top quality income trusts, corporate bonds and some Great Stocks) will have grown to $29,075. The end result is that taking out the RRSP loan has increased your wealth by $15,454 ($29,075 - 13,621).

Even more important, if you never contribute another penny and are able to maintain that 8% annual return, your RRSP will grow to $137,000 in another 20 years. The key, as you can see, is to put the contributions to work as soon as possible.

Watch Out for a Cash Flow Crunch
A big loan can take a lot of money out of your monthly cash flow. Ask yourself: "If interest rates go up, would I be able to work higher monthly payments into my budget?" Remember, the interest rate on the loan is only fixed for the first year. So if interest rates go higher, you may find yourself having to pay more interest. Consider if you can afford to make regular RRSP contributions while repaying the loan. If you don't think you can, at the end of a ten-year loan, you'd have to catch up the contributions you didn't make while you were repaying the loan.

To tailor RRSP borrowing to your cash flow, consider arranging a series of small loans with easily-affordable interest and principal repayments. As one small loan is retired, take out others until your unused contribution room is exhausted.