How to use an RRSP loan to maximize your contributions
Brooke Thio, Content Specialist
For many Canadians, RRSP season highlights the gap between how much they’d like to contribute and how much they can actually afford before the deadline. If you have contribution room but not enough cash on hand, an RRSP loan can be a way to increase your deposit and potentially generate a larger tax deduction. Used strategically, it can help you boost your retirement savings, but only if the borrowing cost makes sense.
What is an RRSP loan?
An RRSP loan is a personal loan you take out specifically to make an RRSP contribution before the annual deadline. The lender advances a set amount, and the proceeds are deposited into your RRSP so you can claim the contribution as a deduction on your Canadian income tax return for that year. The goal is to increase your contribution when you’re cash-short, potentially generating a larger tax refund that can help offset the cost of borrowing.
In practice, many RRSP loans are structured so the funds go directly into an RRSP account (often at the same bank or credit union), ensuring the loan is used for its intended purpose. They’re commonly offered as short-term loans (often around 12 months) for smaller top-ups, or longer-term “catch-up” loans designed to help investors use unused contribution room from previous years.
By increasing your RRSP contribution, you may be able to reduce your taxable income for the year and generate a tax refund, depending on your marginal tax rate. Many borrowers apply that refund directly to the loan balance to lower the overall borrowing cost. However, an RRSP loan is still debt: you’ll make payments and pay interest until it’s repaid. The strategy tends to work best when the tax benefit, combined with long-term, tax-sheltered investment growth, outweighs the interest charged on the loan, which is why the gross-up and top-up approaches discussed below focus on using the refund strategically.
How RRSP loans work
If you decide to get an RRSP loan, there are three strategies you can use to maximize the benefits while minimizing the cost of borrowing:
1. Gross-up strategy
The first strategy is to increase your current contribution by taking out a loan and paying it off in full before you have to begin making repayments. Some financial institutions allow you to defer payments by 60 to 120 days, which should provide you with enough time to receive your tax refund and apply it towards the loan before you have to make your first payment.
Let’s assume you live in Manitoba, you earn $62,000 a year (therefore, your marginal tax rate in 2024 is 33.25%), you have $15,000 in RRSP contribution room, and you’ve saved enough to make a $5,100 contribution. If you decide to borrow $2,500, you can increase your contribution to $7,600. This will result in a potential refund of $2,527 ($7,600 contribution x 33.25% marginal tax rate = $2,527), which will pay off the loan in its entirety (excluding interest). Keep in mind that your actual refund will depend on your marginal tax rate and overall tax situation. If you have other deductions or credits, the amount may differ from these examples.
2. Top-up strategy
The second strategy is similar to the first but in this case, your refund will pay off a portion of the loan. We’ll assume your salary and unused contribution room are still the same but you only have $2,000 to contribute. If you borrow $5,000, you’ll increase your total contribution to $7,000. This will result in a possible refund of $2,327.50 ($7,000 contribution x 33.25% marginal tax rate = $2,327.50). If you use your refund to help pay down your loan, you’ll pay off nearly half of it and owe $2,672.50 (excluding interest).
With the first two strategies, your loan term is usually for one year and the interest rate is often at or near the prime rate (currently 4.45%). Note that your rate may be higher if you don’t have a good credit score.
3. Catch-up strategy
The third strategy is where you borrow a large amount of money using a long-term RRSP loan — often marketed as a catch-up loan — to make the maximum allowable RRSP contribution. We’ll assume your salary and unused contribution room is the same, but you don’t have any money saved to contribute to an RRSP. If you get a $15,000 loan, this will result in a potential refund of $4,987.50 ($15,000 contribution x 33.25% marginal tax rate = $4,987.50). Using your refund can help pay off nearly one-third of your loan immediately (excluding interest).
The term for a catch-up loan is usually for two to five years although some financial institutions may offer terms of up to 10 years. Many institutions will let you borrow up to $50,000. However, longer-term loans often come with higher interest rates.
Can you use an RRSP loan for the Home Buyers’ Plan?
When it comes to using your RRSP for the Home Buyers’ Plan, it doesn’t matter where your funds come from, but they must be in your RRSP account for 90 days before they can be withdrawn. Therefore, technically, you can use an RRSP loan for this purpose. If you’ve done the math and can fully repay the RRSP loan before getting a mortgage and buying your first home, it might make sense to do this. Otherwise, an outstanding RRSP loan may affect your debt servicing ratio and your ability to get approved for a mortgage.
Also read: Should you take out a loan?
Benefits and drawbacks of an RRSP loan
Despite the potential benefits, taking an RRSP loan to maximize your contributions may not be the best move. Here are the main pros and cons of RRSP loans:
| Benefits | Drawbacks |
| Tax savings: Contributing to your RRSP gives you a tax deduction, as well as tax-sheltered investment growth. Deferred repayment: Some financial institutions allow you to defer your RRSP loan repayment for up to 120 days, giving you ample time to get a tax refund to pay it off. |
Limited savings: If you’re in a lower tax bracket, borrowing to maximize your RRSP contribution will only offer modest savings. You’re going into debt: Even with a short-term RRSP loan, you’ll incur interest until you repay the loan. |
It’s vital that you assess your budget and investment portfolio before borrowing to invest in your RRSP. Interest paid on an RRSP loan is not tax-deductible, so the cost of borrowing should be weighed carefully against the expected benefit. To get the most out of an RRSP loan strategy, your RRSP should grow at a faster rate than the interest charged by the loan.
If you decide to get a loan and can’t pay it off entirely with your tax refund, ensure you can take on additional debt. And if you do get a tax refund as a result of taking out a loan, it should be used to pay down the money you borrowed and not for a vacation or a shopping spree.
Should you borrow to contribute to your RRSP?
The strategies above show how an RRSP loan can be structured to limit interest costs. Whether you should use one depends largely on how quickly you can repay it.
Short-term RRSP loans, particularly when you’re using your expected tax refund to reduce or eliminate the balance, tend to carry less risk. In those cases, the loan is acting as a temporary bridge to increase your contribution before the deadline.
Longer-term loans are a different decision. The more time you take to repay the balance, the more interest you’ll pay, and the less certain the benefit becomes. If you need several years to repay the loan, it’s worth asking whether contributing a smaller amount with your own savings would be more manageable.
You should also consider what else is happening financially. If you’re planning to apply for a mortgage soon, managing other debt, or working with variable income, adding another loan may complicate things. On the other hand, if your cash flow is stable and you have a clear repayment plan, an RRSP loan can be a way to use your contribution room more effectively.
Like any borrowing decision, it comes down to affordability and timing, not just the size of the refund.
The bottom line
An RRSP loan can be a useful tool if it helps you increase your contribution and you have a clear plan to repay it quickly. But an RRSP loan is still a type of debt. Before applying, make sure the payments fit comfortably within your budget and that the potential tax benefit justifies the interest cost.