BMO Retro-Activator RRSP Loan

This one-time loan is ideal if you have unused room in your R R S PRRSP and want to maximize your contribution. Loans start at $7,500 🎁

If you’ve missed contributions to your RRSP in past years, the BMO Retro-Activator RRSP Loan is a smart way to get back on track. This loan is specifically designed to help Canadians maximize their unused RRSP contribution room, boost retirement savings, and potentially receive a larger tax refund.

Key Benefits
✅ Borrow to catch up on unused RRSP contributions
✅ Potential for immediate tax savings
✅ Flexible repayment terms to suit your budget

With the BMO Retro-Activator, you can take control of your retirement future—one smart step at a time.

What Is an RRSP Loan?

An RRSP loan is a personal loan tailored for the purpose of making contributions to your RRSP. The primary appeal lies in the tax deduction you receive from contributing to your RRSP, which can reduce your taxable income and potentially lead to a tax refund. Financial institutions often preapprove individuals for these loans, sometimes sending offers by email or mail, encouraging you to borrow money to invest in your retirement savings.

Before jumping on such an offer, it’s crucial to understand exactly what you’re getting into. Let’s break down the advantages and disadvantages so you can weigh whether an RRSP loan is the right financial tool for you.

Pros of Taking an RRSP Loan

1. Immediate Tax Deduction and Potential Refund

The standout benefit of an RRSP contribution—whether funded by cash or a loan—is the tax deduction it generates. This deduction lowers your taxable income, which can reduce the taxes you owe for the year. For those who are self-employed or have high taxable income, this deduction can be particularly valuable.

Many people use the tax refund generated from their RRSP contribution to help repay the loan. While this refund will never cover the entire loan amount, it does provide a behavioral nudge—a kind of forced savings mechanism. In other words, the loan can motivate people who might otherwise avoid saving to commit to investing for their future.

2. Maximizing Tax Benefits in High-Income Years

If you experience an unusually high-income year—perhaps due to a large bonus, commission payout, or sale of a property—your taxable income might push you into a higher tax bracket. In these situations, an RRSP deduction can be worth significantly more than in a typical year.

For example, if your marginal tax rate jumps from 33% to 45% because of your increased income, each dollar you contribute to your RRSP could save you 45 cents in taxes instead of 33 cents. Borrowing to maximize your RRSP contribution in such a year can amplify your tax savings, making the loan more attractive.

3. Lower Cost of Borrowing Compared to Other Loans

RRSP loans often come with lower interest rates than other forms of borrowing, such as credit cards or unsecured lines of credit. While credit cards can have exorbitant rates (often 20%+), RRSP loans are typically offered at prime rate or just above it. As of now, the prime rate hovers around 5.45%, making RRSP loans relatively affordable when compared to other debt options.

Although you might find cheaper borrowing rates through other means such as a home equity line of credit (HELOC), RRSP loans still often represent a cost-effective way to finance your RRSP contribution.

4. Encourages Long-Term Investing

While borrowing to invest is not without risk, the principle of investing for your long-term future is generally sound. If an RRSP loan nudges you to prioritize your retirement savings over discretionary spending, it could be a positive financial decision in the bigger picture.

Of course, borrowing to invest is not ideal for everyone. But if you’re disciplined and have a solid repayment plan, this strategy might help you build wealth over time.

Cons of Taking an RRSP Loan

1. Interest Costs Are Real and Reduce Net Returns

Despite the tax benefits, an RRSP loan is not free money. Interest on the loan adds to your costs and reduces your overall investment return. Even if the loan interest rate is low, it’s an extra expense that you need to factor into your calculations.

This means that your net gain from investing in your RRSP will be your investment returns minus the interest payments. If your investments don’t perform well, or if the interest costs are high relative to returns, you could end up worse off.

2. Other Borrowing Options May Be Cheaper and More Flexible

If you have access to a home equity line of credit (HELOC), this might be a better option. HELOCs often have interest rates that are lower than or comparable to RRSP loans and come with more flexible repayment terms.

For example, some HELOCs offer prime minus a certain percentage, which can be cheaper than an RRSP loan at prime. Plus, HELOCs usually allow you to borrow and repay on your schedule, unlike RRSP loans that often have fixed repayment terms.

3. Interest on RRSP Loans Is Not Tax Deductible

One important tax consideration is that interest paid on RRSP loans is not tax deductible. This differs from borrowing to invest in non-registered accounts, where the interest on investment loans can sometimes be deducted against investment income.

Because RRSP contributions go into a registered account, the Canada Revenue Agency (CRA) does not allow the interest paid on the loan to be deducted. This limits the overall tax efficiency of borrowing to invest through an RRSP loan.

4. Your Tax Refund Won’t Fully Repay the Loan

While the RRSP contribution generates a tax refund, it will never be enough to fully cover the loan repayment. This is because your tax rate is always less than 100%, so you only get a fraction of your contribution back as a refund.

This means you need to have a clear plan to repay the loan through your regular cash flow or other means. Relying solely on the tax refund to pay off the loan is not a viable strategy.

5. Repayment Terms Are Often Inflexible

Most RRSP loans require repayment within 12 months. This tight repayment schedule can be challenging if your cash flow is limited or if you don’t have additional funds to cover the loan payments.

If you didn’t have the cash available to invest in your RRSP before, it’s worth questioning whether you’ll have the cash to repay the loan now. The inflexible terms can put strain on your budget if you’re not prepared.

6. Limited Investment Choices and Potential Conflicts of Interest

RRSP loans are typically offered by banks and financial institutions that require you to invest in RRSP accounts they open for you. Often, you are limited to specific investment products that they sell, such as mutual funds with management fees.

This setup means the lender profits not only from the interest on the loan but also from fees on the investments you make. While this is not inherently bad, it’s important to be aware of potential conflicts of interest and to ensure you’re making investment choices that align with your goals rather than the bank’s incentives.

7. Investment Risk and Leveraged Investing

Borrowing to invest is a form of leveraged investing, which magnifies both gains and losses. If your investments decline in value, you still owe the loan principal plus interest, which can lead to a net loss.

While investing in broadly diversified mutual funds reduces the risk of your portfolio dropping to zero, market fluctuations over short periods can still impact your investment value. Leveraged investing increases your exposure to risk, so it’s crucial to be comfortable with the possibility of short-term losses.

8. Using Debt to Invest May Signal Financial Strain

If you find yourself needing to borrow money to invest, it might indicate underlying financial challenges. Perhaps your regular expenses or lifestyle costs are growing faster than your income, leaving little cash flow to save.

In such cases, borrowing to invest could exacerbate financial stress rather than improve your situation. It’s important to address any cash flow problems before taking on investment debt.

9. Pre-Approval Does Not Guarantee Appropriateness

Financial institutions often send pre-approved offers for RRSP loans without fully understanding your financial picture. Receiving a pre-approval letter doesn’t mean the loan is right for you or that you even have RRSP contribution room.

For example, Evan Neufeld himself received multiple unsolicited pre-approved RRSP loan offers from banks where he has only minor accounts. This highlights the importance of skepticism and due diligence before accepting any financial product.

Who Should Consider an RRSP Loan?

After examining both sides, my overall opinion is that RRSP loans are suitable only for a very specific subset of investors. For most people, borrowing to invest—even for retirement—is not advisable. The risks, costs, and inflexible repayment terms often outweigh the potential benefits.

If you have a stable financial situation, a plan for repayment, and are in a year of unusually high income, an RRSP loan might make sense to maximize your tax deductions and invest for retirement. However, if you are borrowing because you lack cash flow or are stretched thin financially, it’s probably best to avoid these loans.

Remember, investing is a long-term game, and building wealth steadily with your own savings is often the safer and more sustainable path.