Are RRSP loans worth it? | The pros, cons and the math before you decide
Are you falling behind on RRSP (registered retirement savings plan) contributions and worried about retirement? An RRSP loan could help — but is it the right choice for you?
What is an RRSP loan?
An RRSP loan lets you borrow money to boost your retirement savings and maximize your contribution room. It helps you get tax breaks now while paying off the loan over time, making it easier to grow your retirement fund faster.
How RRSP loans work
You borrow funds to make a lump sum RRSP contribution, allowing you to maximize your tax deductions. You’ll repay the loan with regular principal and interest payments while your RRSP grows tax-deferred, boosting your retirement savings.
These unsecured personal loans, offered at favourable rates, help Canadians top up their annual contributions and earn a fat tax refund. But when borrowing to invest, how can you tell whether the risks outweigh the rewards?
Are RRSP loans worth it?
Borrowing money is so common that many Canadians likely do it without thinking twice about the risks. However, it’s essential to understand an RRSP loan before committing to one.
To borrow for an RRSP, you take out a lump sum at a modest interest rate, and put it into your RRSP investment, to maximize your contribution for the year. Then you repay the loan in installments. Most borrowers will also use the tax refund they net to make a significant principal payment.
In the best-case scenario, the tax refund borrowers receive will cover not just the cost of borrowing but also help knock out a big chunk of the principal — keeping payments manageable for the rest of the loan’s term.
Let’s say you borrow $10,000 at a 3% interest rate. That will end up costing you around $165 in interest. But over the year, your investment earns 5%, meaning you’re coming out about $335 ahead.
If you invest your RRSP loan in the stock market, you're using borrowed money to invest, a strategy known as leverage. While it can offer higher returns, it also carries significant risks.
However, Tony Maiorino, the head of RBC’s Wealth Management team in Toronto1, says it doesn’t have to be riskier than other loans. In fact, he started using the strategy when he was in his 20s and just starting his career.
“At the time … I had no idea where my career was going to go,” says Maiorino.
So he weighed his options and felt it would be riskier to potentially run out of money in retirement than to experience a loss today.
“I knew not having enough is way worse than a market decline tomorrow, because I believed I could make that up,” he says.
In fact, Maiorino still uses this strategy. Now, he uses a line of credit each month to top up his investments, paying it down as much as possible by the end of the year. This approach ensures that he continues making regular and consistent contributions even if cash is tight one month.
While it has worked for Maiorino, it’s not a strategy that works for everyone.
How to get a loan for your RRSP
You only need to meet a minimum credit score to borrow for an RRSP. But, although these loans are relatively easy to get, borrowers should be aware of the risk of a financial loss.
Say you borrow $10,000, invest in your RRSP with it, and the market tanks the next day. You’re still on the hook to pay back the full $10,000 and any interest you owe, even though your investments may only be worth $8,000 now.
“From a financial planning standpoint, it is definitely a higher risk strategy,” says Nico Wong, a financial advisor with BlueShore Financial in Vancouver2.
Wong says he wouldn’t recommend this approach for DIY investors or people who don’t have a good sense of their own risk profile.
“At the end of the day, there are no guarantees with the markets,” says Wong. “And the risk is borne by the investor.”
If that prospect will keep you up at night, this is likely not strategy for you.
Expert opinion: Don’t rush into a decision
If… you’ve only got a couple hundred bucks at the end of the month, your cash flow is too tight to add another $250 for a $15,000 RRSP loan.
Mark Yamada, president and CEO of PUR Investing in Toronto3
Yamada urges prospective borrowers to consider their cash flow. Although most should expect a tidy tax refund to pay down part of the loan’s balance, you may end up needing that money for more pressing things by the time the CRA issues your refund.
RRSP loan alternatives
For those who could suddenly be short on cash, a more straightforward strategy is investing what you would have paid in loan installments each month. Not only will you avoid paying interest, but if your situation changes suddenly, you can reallocate those funds, worry-free.
“If you have the discipline to do that, it's a far better way of doing it,” says Yamada.
Ensuring an RRSP loan is the right strategy for you may require some research.
And if you’re feeling pressured to decide on a short timeline, chances are good you may not make the best choice.
“Go and spend $3 and get an ice cream cone and think it over,” says Yamada. “That’s a good investment.”
An former seller's take on RRSP loans
As a newly minted "banker" the first loan I ever wrote back in 2005 was an RRSP loan. I was just a telephone banker at a major bank’s call center, and it happened to be "RRSP Season" just as I finished my training, so after being briefed on “What is an RRSP?”, I learned there’s this magical way of making RRSP sales appear out of thin air by doing an RRSP loan.
At the call centre, we recorded sales by quantity, so getting one customer to take out an RRSP loan, open a new RRSP and purchase a couple of GICs within the RRSP could quickly meet half a day's quota.
What I’m getting at with my slight against the banks and their omnipresent sales culture is that for the most part, RRSP loans are nothing more than sales tools. A sales catalyst, so to say, to help make "money in" sales just like car loans help dealerships sell their inventory.
RRSP loan rates also tend to be very low, to the point where banks make very little money on them. But should you really borrow money to fund your RRSP?
RRSP loans are a great tool to help drive RRSP sales, and when you really need them, they’re there. Since I became an actual accredited financial planner and started giving real advice, I’ve found using RRSP loans to be pretty rare in my practice.
Good planning has you putting money into your RRSP on a regular basis through a monthly preauthorized contribution (PAC), or if cash flow restricts you from making RRSP contributions with your own money, prioritizing your spending/saving/debt repayment goals most prudently.
In most cases, if a client can’t afford to top up their RRSP, usually they’re in a lower income tax bracket and don’t benefit that much from the contribution anyway (or can wait till future years to get more aggressive about their RRSP).
Maybe they should devote more money toward their mortgage to free up cash flow in the future, or the TFSA should be their priority anyway. (As far as I know, there are no TFSA loans.)
Markus Muhs4, CFP®, CIM® is a portfolio manager at Canaccord Genuity Wealth Management in Edmonton, Alberta. He provides comprehensive financial planning and wealth management to families with assets over $300,000 across Alberta, British Columbia and Ontario. Markus alternatively provides fee-for-service (fee-only) financial planning to non-asset-based clients.
When an RRSP loan makes sense
In the past decade, I can count on one hand the number of RRSP loan applications I’ve done for clients. It’s always a case of a high-income earning client, who really benefits from the RRSP contribution as they’re in one of the highest tax brackets, needing to contribute but otherwise being cash strapped due to ongoing debt repayment.
An example might be a newly practicing physician whose high income goes primarily toward paying off student loans, leaving only a little else to maximize RRSP contributions — or business owners with high taxable incomes but limited personal cash on hand.
Those are literally the clients I’ve done RRSP loans for in the past decade, and usually just for one year, after which we set up PACs to take care of their contributions in the future. RRSP loans aren’t helpful for most people.
- Markus Muhs
Examples using an RRSP loan calculator
| RRSP loan of $25,000 at 5% interest | RRSP loan of $10,00 at 3% interest | RRSP loan of credit $5,000 at 7% interest |
|---|---|---|
| Remaining balance after applying the 30% tax rebate: $17,500 | Remaining balance after applying a 30% tax rebate: $7,000 | Remaining balance after applying a 30% tax rebate: $3,500 |
| Monthly payments: $1,531.25 to pay off the remaining balance within one year | Monthly payments: $600.83 to pay off the remaining balance within one year | Monthly payments: $312.08 to pay off the loan within one year |
| Total cost of borrowing (interest paid): $875 | Total cost of borrowing (interest paid): $210 | Total cost of borrowing (interest paid): $245 |
*The average interest rate for RRSP loans in Canada tends to vary depending on the lender and loan term, but as of 2024, it typically ranges between 7% and 8.5%. For example, Desjardins offers RRSP loans with fixed rates around 7.2% for a one-year term, while National Bank's RRSP loans range from 7.2% to 8.45% depending on the term length and whether the rate is fixed or variable. These rates may fluctuate with the prime lending rate and can also depend on factors like your credit score and the specific financial institution. Some banks also offer promotions or deferred payment options during RRSP season, which could influence the effective cost of borrowing.
In summary
Ultimately, whether an RRSP loan is worth it depends on your financial situation and comfort with risk. Weigh the pros and cons carefully, consult a financial advisor, and remember that long-term planning often offers the most sustainable path to retirement security.
Investing in your RRSP monthly rather than taking out a loan can save you from the financial strain of debt payments and the added costs of missed or late payments. For instance, with a $5,000 loan at 7%, you’d pay an extra $245 in interest alone.
By setting up automatic monthly contributions of $416.67 throughout the year (to get to $5,000 contribution), you not only avoid borrowing costs, but also establish a consistent habit of saving for retirement. This approach keeps you in control of your cash flow, helps grow your retirement fund steadily, and eliminates the stress and risk associated with debt.
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Sigrid’s is Money.ca's associate editor, and she has also worked as a reporter and staff writer on the Money.ca team.
Tyler Wade has worked in personal finance for over 5 years writing for brands like Ratehub, Forbes, KOHO, and now Money.ca.
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