Like most Canadians, I want to maximize my tax refund.

Given that Registered Retirement Savings Plans (RRSPs) are one of Canada’s best tax shelters, I had planned to apply for a $10,000 RRSP loan from my favourite bank.

But a little voice inside my head kept nagging, “Why are you going into debt to build up your savings?”

It just didn’t make sense to commit money from my future earnings to pay for an RRSP loan plus interest, when right now, I can’t afford to make that same RRSP contribution.

According to Gail Vaz-Oxlade’s bestseller “Never Too Late,” RRSP loans only make sense for Canadians who are in the top tax brackets, who can repay their borrowings within one year and who can continue to make monthly contributions to this year’s RRSP as well. Here are some other things to consider:

Tax refund challenges
You might be considering repaying your RRSP loan with your tax refund. However, many RRSP loan presentations assume the highest marginal tax brackets, even though the average applicant’s earnings fall well below those majestic sums. In reality, tax refunds are often tinier than those enticing promotions.

Another problem is that most of us have multiple competing bills to pay, including mortgages and car loans. When a tax refund arrives, we often use that money towards immediate expenses. Worse, we waste our refunds on impulsive shopping binges.

Really interesting costs
Curious, I investigated how much an RRSP loan would cost given that interest rates are at historic lows.

My banker said that the interest charge is 4 per cent for an RRSP loan repaid within a year. Take two years to repay, and the rate jumps to 5 per cent.

If I chose the two-year term loan, my corresponding RRSP investments would have to earn at least 5 per cent just to break even. Even with a respectable 8 per cent return, loan interest would consume almost two-thirds of my investment gain.

For a $10,000 RRSP loan at 5 per cent, interest charges total $529. And since most RRSP loans involve variable rates, I could face even higher interest costs next year.

The better RRSP way
Then it hit me.

I revisited the banker’s RRSP loan calculation and noticed that the $10,000 RRSP loan required $438.71 in monthly payments over two years. If I contributed that same amount to my RRSP monthly through automatic deductions going forward, I could reduce future taxes while retaining that $529 in loan interest charges.

My inability to make a big RRSP contribution this year won’t be devastating. Since you don’t lose unused RRSP contribution room, I can catch up later when I can afford to save more.

For now, I can better focus on building up an emergency fund using a Tax-free Savings Account and prioritize paying off other debts, including this year’s slightly larger tax bill.

Once those financial chores are completed, I’ll have more funds available to contribute to my RRSP and dedicate to other savings — without having to resort to debt financing.