What is an RRSP Contribution?
An RRSP Contribution is money you deposit into an RRSP account (registered retirement savings plan). This is an investment account that you hold in a financial institution. That money, also known as the contribution, is tax-deductible.
How Does My RRSP Contribution Affect My Taxes?
In Canada, we are taxed on our income, both at the federal and provincial levels. If you’ve been reading up about RRSPs, you’ve been hearing a lot about the looming February 29 (for 2024) deadline, encouraging you to make your RRSP contributions to maximize your potential tax benefits in time for this year’s income tax filing.
The taxes you owe are determined by the taxable income you have. That number can be significantly reduced by various deductions, and especially by your RRSP Contribution.
Additionally, as this is an investment account, your money will most likely grow in value every year. However, this new money will also remain tax-free (until you withdraw it at retirement).
When are RRSP Contributions Due?
The deadline for contributing to your RRSP for the 2025 tax year is March 4, 2026. Anything you contribute after this date will impact your tax return next year.
How Do I Maximize My RRSP Contribution?
Since you can only contribute a certain amount every year, first, find out how much that is. Start by checking last year’s Notice of Assessment, which you received from the Canada Revenue Agency (CRA). This includes unused contribution limits from past years. You can also get this information by logging into your CRA account.
When you’re ready, deposit whatever money you have managed to save throughout the last year into your RRSP account.
However, you may not have enough saved to make a significant contribution before the deadline.
To maximize your contribution this year, an RRSP loan might be worth considering.
Remember: If you already contribute to a pension plan (through work, perhaps), your maximum contribution will be reduced. This is known as PA-pension adjustment, and it’s on your T4 from your employer, in box 52, or in box 034 of your T4A from a different pension-type fund.
How Does an RRSP Loan Work?
An RRSP loan works almost like a personal loan. But RRSP loans have specific advantages. Your amortization (length of the loan) is 6 to 12 months. Your interest rate is typically lower than other kinds of loans.
You may even be able to defer your first monthly payment by a few months, so that you’re not out of pocket, while you wait for your potential income tax refund. Then, once you get your tax return, you can pay the loan back.
How do I know if borrowing will deliver the best rate of return?
There are several factors that will help you determine if an RRSP loan is worth it. Once you know what your contribution limit is, you’ll want to check out which tax brackets (and marginal rates) you fall into to calculate the difference:
- 2025 federal income tax and
- 2026 & 2025 provincial tax brackets you fall into.
Then, calculate your deductions (there are many great ways to maximize your tax return deductions), such as your RRSP Contributions.
What is the difference between how much tax you owe without the RRSP deduction, and how much less you owe with the RRSP deduction?
In general, the higher your tax bracket, the more benefit you’d likely gain from borrowing to maximize your RRSP contribution. That’s mainly because your tax refund is likely to be smaller when your income is lower. If you can get a bigger refund that will cover a significant portion of the loan, there is a bigger advantage in getting a loan.
Furthermore, your RRSP investments will continue to grow tax-free income, giving you long-term compounding interest that also boosts your long-term bottom line.
Finally, if you’re good at paying your bills on time but struggling to put money into savings each and every month, using a reasonably priced RRSP loan will significantly advance your retirement goals by creating a savings habit, as you’ll be forced to make the monthly payments.
Is the Interest on an RRSP Loan Tax Deductible?
In most cases, the interest paid on this loan won’t be tax-deductible, although if you have investments other than RRSPs, there may be a way to make it so. If you don’t currently contribute to an RRSP (Registered Retirement Savings Plan), it’s not too late to benefit from the significant tax deduction for the 2026 tax year.
Is it Worth it Borrowing Money for an RRSP?
When it comes to borrowing money for an RRSP, it can be worth it if you’re in a higher tax bracket. However, you need to consider the cost of the loan compared to how much income tax you will save. The strategy that many who do this use is to borrow the funds, get a large tax refund and then use that refund to cover the cost of the loan.
On the opposite side of this, though, using this strategy can be risky. Sometimes the market can drop, costing you more money, or the loan repayment can end up creating cash flow issues for you. For many, an alternative is to save money into a Tax-Free Savings Account instead. With this, you can earn money tax-free, and there are no penalties for withdrawals.
Other Benefits of Borrowing to Maximize My RRSP Contributions
In addition to some calculable benefits, your RRSP loan works as an effective retirement savings plan because the funds are deposited directly into the RRSP account, starting to grow for you right away.
You can also deduct contributions made to a spouse’s RRSP, a great tactic if you are too old to contribute to your own RRSP, although be careful, as this reduces your own contribution limit.
Remember: December 31 of the year you have your 71st birthday is the last day you may contribute to your own RRSP.
Another advantage of an RRSP loan: You can repay part or all of the loan, without penalty, and without extra fees. The shorter the loan, the more cost-effective this option becomes.
Strategies for Maximizing RRSP Contributions with Loans
Whether or not you should get an RRSP loan depends on a variety of factors, including your marginal tax rate, how much unused RRSP contribution room you have, and what loan rate you qualify for. Here are some strategies that are used when getting an RRSP loan.
1. The Gross-Up Strategy
The most commonly used strategy is the gross-up strategy. This involves borrowing an amount that will create a tax refund that is large enough to pay off the loan quickly. By doing this, you can avoid a monthly loan payment and not have to pay interest on the money you put into your RRSP savings.
2.Catch-Up Loans
With catch-up loans, you can take out a large loan to leverage all of your unused contribution room, which includes unused contribution room from previous years. If you are in a lower tax bracket or make regular RRSP contributions, this may not be the best strategy for you.
3.Short-Term Financing
To take advantage of tax savings, you can get deferred repayment for 60 to 90 days on short-term RRSP loans. With this strategy, you can get a larger tax deduction, pay off the loan in one lump sum, and avoid a loan payment. You also won’t have to worry about any repayment terms.
Before you invoke any of these strategies, though, you should make sure you get the RRSP loan right for you. Speaking to a financial advisor at most financial institutions, including RBC Royal Bank, can help you determine which option is best for you.
Pros and Cons of RRSP Loans
While an RRSP loan can lead to additional debt, you can also play catch-up and leverage unused contributions from previous years to make a bigger contribution. Let’s take a closer look at some of the pros and cons of doing this.
| Pros | Cons |
| You can lower your total taxable income and get a higher tax refund. | The interest you pay can reduce or negate the financial benefits. |
| You can grow your tax sheltered savings faster than making regular contributions. | Whether the money you invest earns interest or not, you still have to pay the loan according to the loan terms. |
| You can use the refund to pay off the loan faster or in full. | Your tax situation may not make it beneficial to do so, even if you have the financial means. |
| Many lenders have flexible terms and you don’t have to start repaying for 60 -90 days. You may even be able to pay the loan in full before your first payment. | Not paying down the loan properly or efficiently can end up leaving you with more debt. |
Interest Rates on RRSP Loans
The loan rate that you get in Canada for an RRSP loan will depend on your financial situation, your credit score, and your debt-to-income ratio. The rate will also depend on which lender you use. That said, the rates right now range from Prime + 0% to Prime + 3%. With the current interest in Canada, the rates are extremely competitive.
Final Thoughts
While borrowing to invest isn’t the right solution, it can be a great option for those who are in a higher tax bracket and haven’t used previous year’s contributions. This allows you to invest a larger amount of money and get a larger tax refund. However, an RRSP loan may not be the best option for everyone. For others, it could actually end up costing you more money in the long run.
