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February arrives and suddenly a sharp stab hits millions of Canadians.

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No, it’s not Cupid: it’s RRSP season.

With the annual deadline approaching, many will suddenly be concerned about whether they’ve contributed enough to their Registered Retirement Savings Plan (RRSP) this year.

But what to do if you don’t have the funds for an RRSP deposit in your account? For some people, the answer is an RRSP loan.

These unsecured personal loans, offered at low interest rates, help Canadians top up their annual contributions and earn a whopping tax refund. But when borrowing to invest, how can you tell if the risks outweigh the rewards?

How it works for investors

Borrowing money is so common that many Canadians probably do it without thinking twice about the risks. However, it is important to understand an RRSP loan before committing to one.

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To borrow an RRSP, you borrow a lump sum at a modest interest rate and put it into your RRSP investment to maximize your contribution for the year. Then pay off the loan in installments. Most borrowers will also use the net tax refund they receive to make a sizeable principal payment.

At best, the tax rebate borrowers receive not only covers the cost of borrowing, but also helps pay off a large portion of the principal — and keep payments manageable for the remainder of the loan’s life.

Let’s say you borrow $10,000 at an interest rate of 3 percent. That will end up costing you around $165 in interest. But over the course of the year, your investment earns five percent — meaning you get about $335 on top of that.

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When your RRSP is invested in stocks, you are effectively borrowing to invest in the market. This strategy, known as leverage, is considered risky.

But Tony Maiorino, who heads RBC’s wealth management team in Toronto, says it doesn’t have to be riskier than other loans. In fact, he started using the strategy when he was in his twenties and just starting his career.

“Back then…I had no idea where my career was going,” says Maiorino.

So he weighed his options and felt that potentially running out of money in retirement was riskier than suffering a loss today.

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“I knew that not having enough was a lot worse than a market drop tomorrow because I thought I could make it up to you,” he says.

In fact, Maiorino still uses this strategy in some way. Now he has a line of credit that he takes each month to top up his investments, which he repays as much as he can at the end of the year – meaning that even if he’s short of cash for a month, he’s still making regular and regular payments makes consistent contributions.

While it worked for Maiorino, it’s not a strategy that works for everyone.

Take more than just market risk

To borrow an RRSP, all you need to do is meet a minimum credit rating. However, although these loans are relatively easy to obtain, borrowers should be aware of the risk of financial loss.

Suppose you borrow $10,000 to invest in your RRSP and the next day the market crashes. You’re still on the hook to pay back the full $10,000 — along with any interest you owe — even though your investments might be worth just $8,000 now.

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“It’s definitely a higher-risk strategy from a financial planning perspective,” said Nico Wong, financial advisor at BlueShore Financial in Vancouver.

Wong says he wouldn’t recommend this approach for DIY investors or people who don’t have a good sense of their own risk profile.

“At the end of the day, there are no guarantees in the markets,” says Wong. “And the investor bears the risk.”

If that view is keeping you up at night, Maiorino agrees, this probably isn’t the strategy for you.

Don’t rush a decision

Toronto-based PUR Investing President and CEO Mark Yamada urges potential borrowers to consider their cash flow. Although most should expect a decent tax refund to pay off part of the loan balance, once the CRA issues your refund, you may need that money for more urgent things.

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Says Yamada, “If … you only have a few hundred dollars at the end of the month, your cash flow is too tight to add another $250 on a $15,000 RRSP loan.”

An alternative strategy

For those who might find themselves suddenly short of cash, an easier strategy is to invest what you would have paid in loan installments each month. Not only do you avoid paying interest, but you can redistribute those funds worry-free if your situation suddenly changes.

“If you have the discipline to do it, it’s a much better way to do it,” says Yamada.

Some research may be required to ensure that an RRSP loan is the right strategy for you.

And if you’re feeling pressured to make a decision in the short term, chances are you’re not making the best choice.

“Go and spend $3, get an ice cream cone and think about it,” says Yamada. “That is a good investment.”

This article is informational only and should not be construed as advice. It is provided without any guarantee.