Insights & advice
Strategies for investing in an RRSP
February 2022 – 15 min read
Key takeaways
There’s more than 1 way to contribute to an RRSP
There are important things to consider when borrowing to invest in an RRSP
Why contribute to an RRSP?
A registered retirement savings plan (RRSP) provides short and long-term tax advantages that can help fund the retirement you want.
You can also use money from your RRSP to help buy your first homeOpens in a new window or fund education for you or your spouse. If you use RRSP funds for these purposes, you must repay them to your RRSP. Any funds you repay to your RRSP aren’t considered contributions and won’t generate a tax refund.
What is the RRSP contribution deadline?
March 1, 2023 is the last day to contribute to you or your spouse’s RRSP to claim a deduction on your 2022 tax return.
RRSP contribution strategies
Lump-sum deposit
This strategy is often where new investors begin. Simply use any amount you have saved somewhere and contribute it to your RRSP. You’ll get a tax deduction in the year you contributed.
In the example below, you’ll notice we mention the marginal tax rate. In Canada, as your income increases, so does your tax rate. Your marginal tax rate is the highest tax bracket (and corresponding rate) that applies to your last dollar of income.
Example:
| Initial RRSP contribution | $5,000 |
| Tax refund based on marginal tax rate of 30%1 | $1,500 |
| Total RRSP contribution | $5,000 |
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
Reinvest your tax refund
This strategy takes the lump-sum strategy up a notch by also contributing the tax refund generated by your original RRSP contribution. This will provide a tax deduction in the year you contribute the tax deduction to your RRSP.
Example:
| Initial RRSP contribution | $5,000 |
| Tax refund based on marginal tax rate of 30% | $1,500 |
| Total RRSP contribution | $6,500 |
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
Catch-up loan
In addition to your lump-sum contribution, you can take out an RRSP loan to maximize your contribution and use up your available contribution room as specified on your Canada Revenue Agency (CRA) notice of assessment. You can use the tax refund to help pay back the loan. Depending on the size of the loan, this can take up to a few months or years.
You may want to use this strategy if you’re having a particularly high-income earning year because the bigger tax deduction will help reduce the potentially larger amount of income tax you’ll be paying.
Example:
| Initial RRSP contribution | $5,000 (client’s investment) + $5,000 (loan) = $10,000 |
| Tax refund based on marginal tax rate of 30% | $3,000 |
| Total RRSP contribution | $10,000 |
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
If you’re concerned about paying back your RRSP loan, you can also borrow an amount equal to the expected tax refund before you make your contribution, then use the actual tax refund to repay the loan.
However, to apply this strategy, you need to know how much you want to contribute, your marginal tax rate, and how much you expect your refund to be based on your RRSP contribution. You’ll also need access to an RRSP line of credit to borrow the expected refund amount so you can contribute the full amount into the RRSP. You can use the formula below to calculate how much to borrow, or leave it to your advisor or tax professional to figure it out for you.
(RRSP contribution amount x marginal tax rate) / (1 - marginal tax rate) = gross-up amount to borrow
Example:
| Expected tax refund | $5,000 x 30% = $1,500 |
| Gross-up amount to borrow | $1,500 / (1 - 30%) = $2,143 |
| Total RRSP contribution | $5,000 + $2,143 = $7,143 |
| Initial RRSP contribution | $7,143 |
| Tax refund based on marginal tax rate of 30% | $2,143 |
| Total RRSP contribution | $7,143 |
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
Important considerations when borrowing to invest
There’s always a risk when using borrowed money to invest. Leveraging magnifies gains or losses. It is important that you understand a leveraged purchase may involve a greater risk than a purchase using cash resources only.
- Interest charges should be minimal, as the loan is expected to be outstanding for only a few months at the most.
- The interest when borrowing to invest in an RRSP isn’t deductible.
- You shouldn’t spend your tax refund. Instead, you should use it to pay off the loan to avoid more interest charges.
- Footnote 1
- 1 Assumed for illustrative purposes. To determine specific marginal tax rate, see Government of Canada. (Jan. 2021). Canadian income tax rates for individuals – current and previous years.Opens a new website in a new window - Opens in a new window
What’s next?
Now that you understand more about the various strategies to contribute to an RRSP, you may want to:
Check your CRA notice of assessment to learn how much you could contribute to your RRSP.
Talk with an advisor about which RRSP contribution strategy best meets your needs.
This information is current as of January 2022. The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of the date of publication. Future changes to tax legislation and interpretations may affect this information. This information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate legal, accounting or tax advisor.
Using borrowed money to finance the contributions involves greater risk than contributing using cash resources only. If you borrow money to make a contribution, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of your investment declines. Investors should only borrow money to make such a contribution if they have the financial resources to assume the risk of the loss of their investment as well as the repayment of any such loan.
