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Jennifer Hughes, a certified financial planner with Modern Cents, which doesn’t sell products or give specific investment recommendations, said that while borrowing can make sense on paper, in practice what happens on repayment matters.

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“People see the numbers, something flashy like what the markets have done, and it’s amazing, and they think, ‘I’ll do this on my line of credit,’” said Hughes.

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For example, the S&P/TSX composite index rose more than 28 per cent last year, Hughes said, but you need a broader perspective that accounts for market volatility and how long it will take you to repay the loan.

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“If you need the loan to make the contribution, what is going to happen if you can’t keep up the loan payments?” said Hughes. “It’s great, you get a loan, you get the refund, but there is still some that you need to pay back.”

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And loans that don’t force you to pay them back over time can be dangerous. For instance, if you borrow on a line of credit, will you actually start paying it down?

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The behavioural aspect of financial management is key, Hughes said.

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You can see the appeal. It’s amazing how many people see their tax refund, created from an RRSP contribution, as some type of windfall and decide they can use the cash for a vacation. That’s easy to understand: It’s the middle of winter and most of the country is covered in snow.

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And recent market returns can make the idea rosy. “It’s easy to talk about the pro side if you can make 20 per cent,” she said. But cash flow is something people really need to consider before borrowing to contribute to either product, Hughes said.

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Peter Wouters, a principal of PlainTalk Consulting Inc. who specializes in retirement income planning, said the borrowing scenario can make sense if you expect to come into some money later in the year, such as a bonus at work.

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“I don’t think it’s something you do every year,” said Wouters, but if you have that contribution room and you are in a higher tax bracket and expect to be in a lower tax bracket when you take it out, it can make sense.

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It can also be a strategic way to invest for the long term, by borrowing to invest at the start of the year and effectively paying down the loan throughout the year, giving you added time in the market. But, again, discipline in repaying the loan is paramount in minimizing any additional risk.

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It is also important to consider the size of the refund you may get. Wouters cautions you to check your tax deductions throughout the year, because you may not get that big refund if your source deductions were lower than expected. Wouters also said if you’re going to borrow money and put the contributions into something like guaranteed investment certificates (GICs), which have a lower interest rate than your loan, borrowing doesn’t make much sense.

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“And what if the market drops? You could end up owing money on something that is dropping in value,” said Wouters.

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Instead of borrowing to fund a TFSA or RRSP, Wouter suggests an alternative that requires discipline.

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Wouters said that if you can afford to make loan payments on your TFSA or RRSP, you are probably better off figuring out what those payments will be and just deducting the amount from your pay.

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“You’ll just have a far better footing, and you won’t have a loan to worry about,” he said. Yes, you won’t have the cash immediately in either plan, but you’ll also be dollar-cost averaging, or contributing a fixed amount at regular intervals, regardless of the asset’s price, to lower the average cost per share or unit purchased and reduce volatility risk.

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At the end of the day, borrowing money for retirement plans can make financial sense, especially for higher earners, with longer time horizons and who want to max out contribution room. But it’s impossible to ignore the risk, and it’s probably not for people already stretched on their credit.

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And with markets looking bubbly and subject to heightened political risk, what may have been a winning strategy in 2025 could be a very different story in the year ahead.

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Read more from our TFSA vs. RRSP series

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Check back every day this week for the latest from the series and find them all here.

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