Mortgage or RRSP? Your opinions please

52 messages -  41 authors -  last post July 16, 2011 - 11:16 PM ET  by Vancouver2014
 
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January 24, 2008 - 12:50 PM ET
Hi, I have an outstanding mortgage on my house for 179 000 $ and I already have some RRSP.  I am 32 years old and my office has a RRSP plan where for every $ I put in they also put in 1 $ up to 5000 $ a year.  With automated pay withdrawal, I have already invested 5 000$ in my RRSP.

But I will still owe some income tax, I always do 8-(

Should I use some savings an put it on my RRSP to save tax or should I do a lump sum payment on my mortgage?

I think that I would be better off having no mortgage as soon as possible but I also like to pay as little tax as possible.

What do you guys think?
#1
January 29, 2008 - 8:35 AM ET

Good question.  Since your employer matches contributions that you make, here is what I would do.  Make a contribution to your rrsp using up any unused contributions and then use any refund to pay off any tax owing.  Putting a lump sum on your mortgage is tempting, but you should be taking advantage of a benefit offered by your employer.

Check with the financial institution that holds your mortgage to see if you can increase your mortgage payments.  If for instance you pay weekly, add another 25 dollars per payment which works out to 1200.00 per year.  Might not seem like much but it adds up.

#2
January 31, 2008 - 5:39 PM ET

If you have your own business, then you can write-off some of your expenses which can reduce your taxes or give you a tax refund.

You can also max out your RRSPs through RRSP loans which will give you a bigger tax credit. And then use whatever you can refund to pay off your debts.

About your mortgage, look for a company that do debt consolidation like S.M.A.R.T. loan, they will give you a plan to pay off your debt quicker.

Hope this helps.

 

#3
February 1, 2008 - 12:41 PM ET
"Should I use some savings an put it on my RRSP to save tax or should I do a lump sum payment on my mortgage?"
Your question focuses on products (RRSP / mortgage) with its own pro/con affecting you. How about focusing instead on setting a  target for yourself? Like - when you want to retire and how much you need to do get there?
Products matter only when it leads to your long term target.  Know the principles of investing, your debt-free date and how to protect/increase your income. Talk with an adviser who can guide you towards financial independence and illustrate how debt, investment and income protection interact. As an analogy, there is a significant difference between going straight to a drugstore and consulting first with a doctor.
Remember, 90% of Canadians retire having to depend on Government Benefits alone. The odds are against us. Nobody plans to fail. Many fail to plan.
Good luck.
#4
February 1, 2008 - 7:05 PM ET

What if exceed the limit of contribution to RSSP ( i.e. investing more than my maximum allowble amount ) ?

#5
February 4, 2008 - 1:03 AM ET

RRSP's are a Sucker's Game of playing the stock market. think about this.... you place $10.000 into the pyrimid of wait and hold. the market goes up... goes down... you gain ZERO.  i spoke to a friend about his RRSP's and he said "for what i thought it would be worth today, I am out $60.000 on paper worth" now i go slow on buy and hold, BANK term deposits, when my term is up I KNOW exactly what i get to re-roll. Now I am not also having my money at high risk in the Pyrimid where only the rich guys that controll this cash get to play the credit bubble. 1929 is nearing us again.... And all the old timers will be pullinjg out the RRSP cash too..... we are fooled into believing that all this CASH will be there in 20 years when it is my time to pull it out.... rethink about the game people.

#6
February 4, 2008 - 8:13 AM ET
Before you stick cash into your RRSP, look at your credit card (s) outstanding balance... Pay that off and learn to live within your means.
#7
February 11, 2008 - 1:24 AM ET
I would suggest you find someone from Primerica to talk to. Their products and coaching are great, taught me a lot of things my so called expert didn't brother telling me.  Their SMART loan saved my life and allows me to sleep at night knowing that I ll be debt free 17 years sooner.
#8
February 15, 2008 - 11:13 PM ET
To answer your question: DO BOTH! Maximimaze your rsp's - at  the end it's the amount of tax you have to pay anyway. With you return ( depending on your bracket, typically 350 back on 1000.00 contributed ) put a lump sum towrds your mortgage, if you don't get one, try increasing your payments on mortgage, double up payments, whatever your bank allows you to do, and depending on your mortgage type, any smallest pre-payment will greatly reduce your total cost of borrowing! Don't forget if you make an rsp withdrawal, that will generate significant tax bill if you are generating healthy income + will eliminate a TAX FREE growth retirement savings. Talk to a smart banker or financial planner... good luck
#9
February 26, 2008 - 10:52 PM ET

The question of RRSP vs. Mortgage principal pre-payment is somewhat complex and notwithstanding the comments above re: the risks of RRSP contributions (i.e. the unknown tax and investment environments in the future), the technique I use is one of total net worth.  That is, I answer the question, 'which option is going to increase my net worth the most'?  Depending on your tax bracket, your available contribution room on your RRSP, the pre-payment options of your mortgage and the current amortization month of your mortgage, the answer might change.  In my past experience, if you are in a higher tax bracket, you should contribute to the maximum of your RRSP limit and take the refund from your tax return and apply that refund to your Mortgage along with any other available money in your budget for Mortgage pre-payments for this year.  Note: I agree with a previous comment about setting goals.  You should start with a goal (strategy) and then use these tactics to work towards your goal.

 

Example: 

a) You have $10,000 budgeted for an annual lump-sum pre-payment on your Mortgage (mortgage rate is 6% and you are in month 60 of your Mortgage amortization period of 25 years with an outstanding P of $180000, original P is $200,000 and you pay monthly)

b) you have $5000 of remaining room on your RRSP contribution limit for this year

c) you have a current tax-owing calculation of $1000

d) you made at least $80000 taxable income each of the last two years (i.e. your marginal rate is ~43%) and you live in Ontario

e) assume that you will will withdraw $ in your retirement at a lower present value rate than you currently earn (assumption is that your marginal tax rate in retirement will be lower than your current marginal tax rate)

 

Scenario 1) max out your RRSP contribution, get $2170 in tax savings for a $2170 - $1000 (tax owing) = $1170 refund and you increased your RRSP savings by $5000.  You still have $5000 remaining in your budget for Mtg pre-payment + $1170 refund = $6170 for your pre-payment. (increase to current net worth = $11170 ($5k rsp, $1.17k return, $5k pre-pmt)) and over the life of your mortgage, you have saved a (future dollars) $7345 in interest payments and shortened your payment schedule by > 5 months.

Scenario 2) You pay the entire $10k into your Mtg pre-payment.  You save (future dollars) $11828 in interest payments and shorten your mtg payment schedule by > 8 months but you only increase your current net worth by $10000.

 

Note that monthly (or more frequent) pre-payments (if offered by your mtg) are a better long term option for decreasing the interest portion of your mtg and shortening your mtg but I can understand the desire for a buffer that you divest as appropriate on an annual basis.

 

#10
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