Borrowing from your RRSP can mean two very different things in Canada. One is an RRSP loan, where a lender gives you money to contribute to your RRSP and you repay the lender. The other is withdrawing money from your RRSP, which is generally taxable and permanently reduces your retirement savings. The two are often confused, and the tax consequences are completely different. There are also two programs, the Home Buyers Plan and the Lifelong Learning Plan, that let you withdraw under specific rules without immediate tax.
RRSP Loan vs RRSP Withdrawal
| Feature | RRSP loan | RRSP withdrawal |
|---|---|---|
| What happens | A lender lends you money to contribute | You take money out of your RRSP |
| Tax | Contribution may be deductible; loan repaid with after-tax money | Withdrawal is added to income and taxed |
| Retirement savings | Stay invested and grow | Permanently reduced |
| Best used for | Topping up a contribution before the deadline | Avoid, except through a registered plan |
How an RRSP Loan Works
You borrow from a bank or lender and use the money to make an RRSP contribution. The contribution may generate a tax deduction that lowers your taxable income, which can produce a refund. Many borrowers use the refund to pay down the loan. The catch is that you are borrowing to invest, so the loan costs interest while the investment return is not guaranteed. If the market falls, you can owe money on an investment that is now worth less. An RRSP loan makes the most sense when you have a stable income, a clear repayment plan, and a short repayment period.
Withdrawing From an RRSP
A regular withdrawal is added to your income for the year and taxed at your marginal rate. The financial institution withholds a percentage at the time of withdrawal, but that withholding is not the final tax; you settle the rest when you file. You also lose the contribution room permanently, so you cannot put the money back later beyond your normal limits. For most people, an RRSP withdrawal is an expensive way to raise cash, because it triggers tax and sacrifices future growth.
The Home Buyers Plan and Lifelong Learning Plan
The Home Buyers Plan lets eligible first-time buyers withdraw from an RRSP to buy or build a home, and the Lifelong Learning Plan lets eligible people withdraw to fund full-time education or training. Both allow a temporary withdrawal without immediate tax, provided you repay the amount to your RRSP over a set period. If you miss a scheduled repayment, the amount you should have repaid is added to your income for that year. The rules, limits, and eligibility conditions are set out by the Canada Revenue Agency, so check them before you rely on either plan.
Questions to Ask First
- Is the withdrawal taxable, or does a registered plan apply?
- What is the repayment schedule, and what happens if you miss one?
- What tax will you owe, and will withholding cover it?
- Can you afford the loan payment and your regular expenses?
- Is there a cheaper way to raise the money?
Alternatives to Consider
Before borrowing against retirement savings, look at a line of credit, a personal loan, or a payment arrangement with the creditor. These options keep your RRSP intact and avoid the tax hit, even if they carry interest. If the need is a home purchase, the Home Buyers Plan may be the most efficient route. If the need is an emergency, a small instalment loan may cost less than the tax you would pay on a withdrawal.
Risks of an RRSP Loan
An RRSP loan is borrowed money invested in a market. If the investment falls, you can end up owing the lender more than the investment is worth. The contribution deduction may reduce your tax, but it does not guarantee a profit. If you lose your job or your income drops, the loan payment continues regardless. Only take an RRSP loan if you can repay it within a year or two from stable income, and if you would still be comfortable with the decision if the market dropped shortly after you invested.
Sources and further reading
- Canada Revenue Agency, for the rules on RRSP contributions, withdrawals, the Home Buyers Plan, and the Lifelong Learning Plan.
- Financial Consumer Agency of Canada, for guidance on borrowing and managing debt.
This is general information, not financial advice. Instalment.ca is a loan matching and comparison service, not a lender and not a financial advisor. All loan terms, rates, and fees are set by individual licensed lenders and are subject to credit approval.