Building your Financial
Success
With Alain Aube
Retirement Planning and RRSP's
Your mortgage or
your RRSP?
NOT SURE WHETHER IT MAKES more financial sense to pay down your mortgage
or contribute to a Registered Retirement Savings Plan? Welcome to the
club - the mortgage-versus-RRSP debate is a hot one among financial
experts and homeowners.
The truth is, there is no definitive answer. While concentrating on the
mortgage may be the best route for one person, focusing on an RRSP may
be better for another.
There's no doubt that no matter what you do, an RRSP is a good
investment. Your contribution earns an immediate income tax break, and
your money grows while sheltered from tax. But you have to decide
whether the long-term growth potential of your RRSP outweighs the
advantages of paying down your mortgage.
You should consider the following factors when making your decision:
Your age. If you're young, an RRSP should probably be a priority. That's
because the sooner you get money into a plan, the longer it will have to
grow. But don't overlook the need to build home equity if you have a
young family. This way you'll get a head start on the expenses of moving
to more elaborate housing as your family grows.
Your income. The higher your income, the higher your tax rate. That
means you must earn more in after-tax dollars to make mortgage payments.
If you're a high-income earner, you may want to quickly get rid of this
expensive debt.
Investment returns. An astute investor with a track record of good
investment returns could be better off investing than paying down the
mortgage. That's especially the case when you invest inside an RRSP,
where tax breaks mean that healthy returns could bring greater financial
benefits than concentrating on your mortgage.
Your mortgage rate. If your current mortgage rate is low, it may make
more sense to invest in an RRSP. Low borrowing costs at times of good
returns in financial markets make a compelling case for investing.
However, if interest rates are high, you could be further ahead
contributing to your mortgage.
Your general financial health. If you're worried about access to cash in
the future - because your job may be in jeopardy or because of health
worries, for example - the money you put into an RRSP will be more
accessible than home equity.
Your pension plan. If you have a generous workplace pension plan that
will provide a secure retirement, you may be able to concentrate more on
your mortgage than your RRSP.
One way to make inroads on both your RRSP and mortgage is to contribute
as much as possible to your retirement plan, and then apply the tax
refund it generates toward your mortgage.
If you're a high-income earner, you may be able to make your maximum
RRSP contribution and still have excess cash. You can't exceed the RRSP
limits set by the federal government, so use the remainder to pay down
your mortgage.
Before you come to any conclusions in the mortgage-versus-RRSP debate,
speak to your financial advisor. He or she can help you decide which
course of action best suits your financial needs and goals.
