Borrowing to invest in your RRSPs is a popular RRSP planning strategy to generate immediate, and often significant, tax savings while investing more up front, generating a larger return on your investment down the road as a result of compounding interest.

Example

  Aaron takes out a $1,500 RRSP Loan at Prime March 1st to take advantage of a five Year RRSP Term Deposit at 2.30%. With the current prime rate of 3.25%, Aaron’s RRSP Loan payment is just over $127 for the next twelve months. By next March, Aaron would have paid a total of $26.52 in interest for the RRSP Loan. 

  During the same period, Aaron’s RRSP investment would have already made $34.50 in interest.

  Comparing the cost of the investment (the payments on the RRSP Loan) versus the return of the investment (the principal balance and interest earned on the RRSP Term Deposit), Aaron has netted a return of $7.98 for the first year. By the time the Term Deposit matures, Aaron would have netted a return of $154.10. This is in addition to the tax savings Aaron will receive come tax time.

  To learn more about the individual features of a RRSP Loan, click here.