Many choices to be made
Have you ever wondered whether it makes more sense to pay off your mortgage or contribute to a registered retirement savings plan (RRSP)? Perhaps you are expecting to receive some extra money from an inheritance or employment bonus and you’re not sure which route to take.
The truth is, there is no easy answer. There are many variables to take into account. Choosing to pay down a mortgage might be the best route for one person while contributing to an RRSP may benefit another.
Here are some factors to consider:
- Your age – When you are young it might be wise to contribute to an RRSP. The sooner you get money into a tax sheltered retirement plan, the longer it has to grow. But don’t overlook the need to build home equity. It can provide a head start when you’re ready to move into a larger home. Extra payments can also lead to significant interest savings over the long term.
- Your income – The more you earn the higher the rate of tax you’ll pay. That means you will have to earn more in before-tax dollars to make your mortgage payments, so you may want to eliminate this debt as soon as possible. That being said, higher tax rates also mean bigger tax savings on your RRSP contribution.
- Investment returns – Pay attention to the rate of return you could reasonably expect to earn on the money you contribute to your RRSP. It’s possible you could be further ahead by investing your money than paying down your mortgage. The benefits of investing in an RRSP are magnified by the tax-deferred growth within the plan and the tax deductions on your contributions.
- Your mortgage rate – If you mortgage rate is higher than your expected investment return on your RRSP, then paying down your mortgage may be a good idea – especially if borrowing costs are expected to rise. Conversely, if your mortgage interest rate is low, it may make more sense to contribute to your RRSP.
- Are you behind on your RRSP contributions? – If you still have available RRSP room, a lump sum contribution would allow you to catch up. This can help you in the current year and also in future years if you don’t claim the full amount.
- Your pension plan – If you have a generous workplace pension that provides for a secure retirement, you may be able to concentrate on reducing your mortgage without giving up financial security in the future.
- Focus on both – Contribute to your RRSP and then apply the resulting tax refund towards a prepayment on your mortgage.
Deciding which route to take is dependent on your present situation. Consider all the factors outlined above, they all come into play when making your decision.
Talk to your Certified Financial Planner to help you make the best decision for your unique situation.
Please contact your own advisor for specific advice about your situation.