Borrowing to fund your

registered retirement savings plan

(RRSP) or your

tax-free savings account

(TFSA) may seem tempting at this time of year, as promotions abound, especially for RRSP loans. But does it actually make sense?

The answer depends on which plan you are targeting, how much you expect to make on investments, your appetite for risk and how disciplined you are in paying off the loan.

With TFSAs, if you invest wisely, your returns could outstrip your borrowing costs. For example, if you had borrowed $7,000 (the annual limit) to max out your TFSA in 2025 and invested it in an exchange-traded fund (ETF) tracking the big six Canadian bank stocks, you could be sitting on a roughly 43 per cent total return, outweighing a borrowing cost of a little above prime, or around five per cent.

Of course, taking out a loan to contribute to your TFSA is really just leveraged investing: it increases risk and could magnify any investment losses, as well as gains. Ultimately, you are betting that your expected after-tax investment return will exceed the loan’s interest rate.

There are no figures on how many Canadians borrow to invest in their TFSAs, but collectively the amount of unused contribution room is significant.

Based on data for 2023, the most recent year available, the Canada Revenue Agency said that of the 18,446,590 Canadians with TFSA accounts, only 1,577,720 had maximized their contributions.

RRSP loans, however, are a different story. The logic is simple enough: borrow to make a big contribution; use the deduction to lower your taxable income; get a refund; then use that refund to start paying down the loan. On paper, it works.

While you can take out a personal loan or home equity line of credit, most banks offer RRSP loans with flexible repayment terms at rates around the Bank of Canada’s prime rate of 4.45 per cent. For example, Royal Bank of Canada offers RRSP loans of up to $50,000 “to catch up on previous years’ missed contributions,” with rates as low as prime and repayment terms of one to 10 years. Canadian Imperial Bank of Commerce offers a limited fixed rate of 3.49 per cent with terms of up to 10 years for repayment on a loan of up to $75,000.

Shawn Stillman, co-founder of Mortgage Outlet Inc., said banks can be aggressive in offering RRSP loans at this time of the year.

He said RRSP loans can make sense if you haven’t contributed in a couple of years, have unused room and land in a high-income year. If the loan is open-ended, you can also pay down part of it in a lump sum when the refund arrives.

You won’t, however, be able to deduct the interest from any loan against returns made in an RRSP or TFSA on your taxes. A deduction only applies to interest paid on loans for investments in a non-registered account or property.

Jennifer Hughes, a certified financial planner with Modern Cents, which doesn’t sell products or give specific investment recommendations, said that while borrowing can make sense on paper, in practice what happens on repayment matters.

“People see the numbers, something flashy like what the markets have done, and it’s amazing, and they think, ‘I’ll do this on my line of credit,’” said Hughes.

For example, the S&P/TSX composite index rose more than 28 per cent last year, Hughes said, but you need a broader perspective that accounts for market volatility and how long it will take you to repay the loan.

“If you need the loan to make the contribution, what is going to happen if you can’t keep up the loan payments?” said Hughes. “It’s great, you get a loan, you get the refund, but there is still some that you need to pay back.”

And loans that don’t force you to pay them back over time can be dangerous. For instance, if you borrow on a line of credit, will you actually start paying it down?

The behavioural aspect of financial management is key, Hughes said.

You can see the appeal. It’s amazing how many people see their tax refund, created from an RRSP contribution, as some type of windfall and decide they can use the cash for a vacation. That’s easy to understand: It’s the middle of winter and most of the country is covered in snow.

And recent market returns can make the idea rosy. “It’s easy to talk about the pro side if you can make 20 per cent,” she said. But cash flow is something people really need to consider before borrowing to contribute to either product, Hughes said.

Peter Wouters, a principal of PlainTalk Consulting Inc. who specializes in

retirement income planning

, said the borrowing scenario can make sense if you expect to come into some money later in the year, such as a bonus at work.

“I don’t think it’s something you do every year,” said Wouters, but if you have that contribution room and you are in a higher tax bracket and expect to be in a lower tax bracket when you take it out, it can make sense.

It can also be a strategic way to invest for the long term, by borrowing to invest at the start of the year and effectively paying down the loan throughout the year, giving you added time in the market. But, again, discipline in repaying the loan is paramount in minimizing any additional risk.

It is also important to consider the size of the refund you may get. Wouters cautions you to check your tax deductions throughout the year, because you may not get that big refund if your source deductions were lower than expected. Wouters also said if you’re going to borrow money and put the contributions into something like guaranteed investment certificates (GICs), which have a lower interest rate than your loan, borrowing doesn’t make much sense.

“And what if the market drops? You could end up owing money on something that is dropping in value,” said Wouters.

Instead of borrowing to fund a TFSA or RRSP, Wouter suggests an alternative that requires discipline.

Wouters said that if you can afford to make loan payments on your TFSA or RRSP, you are probably better off figuring out what those payments will be and just deducting the amount from your pay.

“You’ll just have a far better footing, and you won’t have a loan to worry about,” he said. Yes, you won’t have the cash immediately in either plan, but you’ll also be dollar-cost averaging, or contributing a fixed amount at regular intervals, regardless of the asset’s price, to lower the average cost per share or unit purchased and reduce volatility risk.

At the end of the day, borrowing

money for retirement plans

can make financial sense, especially for higher earners, with longer time horizons and who want to max out contribution room. But it’s impossible to ignore the risk, and it’s probably not for people already stretched on their credit.

And with markets looking bubbly and subject to heightened political risk, what may have been a winning strategy in 2025 could be a very different story in the year ahead.

• Email: gmarr@postmedia.com

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Read more from our TFSA vs. RRSP series

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  • TFSA vs. RRSP: How Canadians from gen Z to the baby boomers can get the most out of their savings
  • TFSA vs. RRSP: Avoid these TFSA and RRSP mistakes to keep the CRA off your back