Every RRSP season, banks across Ottawa promote RRSP loans, the idea being that you borrow money now, contribute to your RRSP, use your tax refund to pay down the loan, and come out ahead. It sounds neat. But does it actually work?
How an RRSP Loan Works
You borrow a lump sum from a lender (typically at prime + 1–2% interest), contribute it to your RRSP before the deadline, claim the deduction on your tax return, receive a refund in spring, and apply that refund toward the loan principal.
If the refund covers most of the loan and you pay off the balance quickly, the interest cost may be modest compared to the years of tax-sheltered growth you've unlocked.
When It Makes Sense
The RRSP loan strategy works best when:
You're in a high tax bracket. If your marginal rate is 40%+, a $10,000 RRSP contribution generates a ~$4,000 refund. Borrowing $10,000 at 7% for 6 months costs roughly $350 in interest. You're well ahead.
You have large unused RRSP room. Carrying years of unused room is an opportunity cost. A loan to catch up can unlock decades of additional tax-sheltered compounding.
You'll repay the loan quickly. The strategy relies on using your refund to immediately pay down most of the loan. If you spend the refund instead, you're just paying interest on money you've locked away.
When to Avoid It
You're in a low tax bracket. If your marginal rate is under 26%, the refund is small and may not justify the interest cost.
You already carry high-interest debt. Adding an RRSP loan on top of credit card or other consumer debt compounds your financial stress.
You might need the cash. If there's any chance you'll need liquidity in the next 6–12 months, don't lock money into an RRSP you can't access without a tax hit.
The Numbers for Ottawa Earners
For a federal government employee in Ottawa earning $95,000 with a marginal rate of approximately 43%, borrowing $15,000 for an RRSP catch-up could yield a ~$6,450 refund. A 6-month loan at 8% costs about $600 in interest. Applied properly, this strategy costs $600 to unlock $15,000 in RRSP room, and those funds compound tax-free for potentially 20+ years.
Alternatives to Consider
Instead of a lump-sum loan, some Ottawa investors prefer setting up automatic monthly RRSP contributions throughout the year. This avoids interest costs entirely and spreads the investment over time (dollar-cost averaging).
Final Verdict
An RRSP loan is a reasonable tool for mid-to-high earners with significant unused RRSP room and the discipline to repay it quickly. For everyone else, consistent monthly contributions are simpler, safer, and often more effective.
