RRSP or pay down mortgage?
With RRSP season now upon us and mortgage rates near historic lows, you may wonder if you should focus on making a contribution to your retirement nest egg or a prepayment on your mortgage principal.
The benefits of making an RRSP contribution are twofold: an immediate tax deduction at your marginal tax rate and the tax-deferred growth of your money until it's eventually withdrawn in retirement.
Paying down a mortgage also makes money for you. It saves you the interest you would have paid on that amount over the life of the mortgage and also helps you pay off your debt faster.
Quantitatively, the preferred solution will depend on several factors, including mortgage rates in the near term, your amortization period, tax rate, expected return on your RRSP and the number of years to retirement. Our team can help you crunch the numbers. However, it's important to note that these factors are estimates only and that the actual results could vary significantly.
Consider doing both
Often, we advise our clients that the lowest-risk solution is to do both - to contribute to your RRSP and then use the tax refund to pay down your mortgage. For example, if you invest $10,000 in your RRSP and apply the $4,200 (based on a 42% marginal tax rate) refund to your mortgage, you would be putting a total of $14,200 to work for your future for the price of only $10,000.
This multi-pronged approach is a bit like diversifying your portfolio. It lets you put your eggs in different baskets, reduce the risk of making a bad call and tackle a number of goals all at once. You not only save for retirement but also reduce debt and build up equity in your home. To learn more, please contact our office for an appointment.
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