The Case for RRSP Loans: Bridging Canada’s $491 Bn Savings Gap
In a period marked by high inflation, rising interest rates, and economic uncertainty, Canadians are re-evaluating how best to protect their financial future. One topic that often sparks debate is the use of RRSP loans—borrowing money to contribute to the Registered Retirement Savings Plan (RRSP).
At first glance, this idea sounds contradictory: why borrow for a retirement account that’s meant for saving? Yet, in the context of widespread under-utilization of RRSPs across Canada, this financial tool might be not just rational but necessary for some households.
The Logic Behind RRSP Loans
An RRSP loan allows individuals to borrow funds—often for a short period—to make or “top up” their RRSP contributions. The immediate benefit is the tax refund that comes from reducing taxable income. Many use this refund to repay a significant portion of the loan within months.
For example, someone earning $100,000 in Ontario with a 43% marginal tax rate could borrow $16,000 to reach their full RRSP limit of $18,000. That contribution yields a $7,700 tax refund, which can be used to pay down the loan, leaving a small balance that accrues interest at around 7%. If their investments earn roughly 6% in the RRSP, the tax refund plus compounding advantage can outweigh the short-term borrowing cost.
In essence, the strategy allows savers to pull future contributions into the present, accelerating the growth of their tax-sheltered savings.
The Philosophical Objection
Still, there’s a legitimate criticism—one that resonates deeply: RRSPs were designed as a public savings policy, not as another leveraged investment product.
Since contribution room is already tied to income, borrowing to fill it seems counter-intuitive. It shifts the RRSP’s spirit—from promoting long-term thrift—to a marketing tool for banks that profit from loan interest and mutual fund management fees.
In this light, RRSP loans appear to be an example of the financialization of social policy—turning a government-backed retirement incentive into a revenue-generating financial product.
The Counter-Argument: Access, Not Exploitation
While the skepticism is understandable, RRSP loans also democratize access. Many middle-income earners have unused RRSP room simply because they lack the liquidity to contribute in lump sums.
According to Statistics Canada (2022), only 21.7% of tax filers made an RRSP contribution. A report from Investment Executive found that unused RRSP contribution room in Canada has swelled to $491 billion. Even among those earning $60,000–$100,000—a group that stands to benefit most from the tax deduction—participation remains low.
Surveys show that 39% of Canadians plan to contribute to their RRSPs this year, down from previous years, with younger Canadians (18–34) and women being least likely to contribute.
This under-participation signals a broader behavioral and liquidity gap. RRSP loans, though imperfect, bridge that gap—allowing individuals to build tax-advantaged savings they might otherwise forgo.
Why It Matters in a High-Inflation Economy
Inflation erodes purchasing power and inflates nominal incomes—pushing more taxpayers into higher brackets. RRSP contributions reduce taxable income, offering immediate relief.
Moreover, RRSP growth is tax-deferred, meaning investments compound faster because they’re shielded from annual taxation. In times when after-inflation returns are low, avoiding this tax drag becomes crucial.
Contributing now, even through a loan, ensures that savings start compounding earlier—countering the corrosive effects of inflation over the long run.
TL;DR
When RRSP Loans Make Sense
The math generally works when:
The loan term is short (typically under 12 months).
The tax refund is used immediately to repay part of the loan.
The interest rate is lower than or close to the expected investment return.
The investment horizon is long enough for compounding to offset borrowing costs.
Under those conditions, the benefit is real—not just a marketing gimmick.
When They Don’t
RRSP loans lose appeal when:
Interest rates are high and markets volatile.
Borrowers are already heavily indebted.
There’s a risk of needing funds early (RRSP withdrawals trigger tax).
Used recklessly, RRSP loans can indeed turn a retirement tool into a speculative one.
Pragmatic Optimism
The truth lies between ideology and arithmetic. Yes, RRSP loans commercialize a retirement instrument—but they also mobilize dormant savings potential.
In a country where nearly half a trillion dollars in contribution room goes unused, strategic borrowing can serve a public good: nudging households toward financial resilience and long-term saving.
As with any tool, the key is discipline—repay quickly, invest prudently, and let compounding do the rest. For many Canadians navigating an uncertain economy, that may be a perfectly rational move.
