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1. I learned you can use your RRSP to pay down part of your mortgage. I initially thought that an RRSP was just a holding account that you didn't get taxed on until you take money out of it.

2. I would like to buy a house when I am older and it is nice to know that there are a number of options and what is most beneficial to me in the long run.

3. In my opinion, paying down your mortgage is the better choice because in the future, when you want to sell your house, you will not have to pay any tax on it (as a primary residence) and you won't need to worry about the bank taking your home.

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Pay Off Your Mortgage or Invest in RRSPs?

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Pay Off Your Mortgage or Invest in RRSPs?

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This article lists each of the benefits of either paying your mortgage off faster or putting money into your RRSP.

The reason that I like this article so much (if not the most) is that the writing is very clear. For each option of paying down a mortgage or investing, the author lists specific points for the benefit of each option. The reader can then determine whether the point applies to their situation or not. It is extremely easy to read this article. You can then make a decision based on specific benefits for you.

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May 20 2010

As we quickly approach the March 2, 2015 RRSP contribution deadline for the 2014 tax year, many Canadians may be wondering whether their extra funds should be deposited into an RRSP account or used towards an extra mortgage payment.

Benefits of Paying Your Mortgage Faster

If you choose to put more money towards paying down the principal of your mortgage, you will benefit in a few ways:

1. You will end up paying less interest which can save you thousands of dollars over the course of your mortgage.

2. You will have more flexibility in the future, where you will have more cash to pay for vacations, higher education for children, etc.

3. If you plan to sell your house before your amortization period is up, you will gain more money in profit the less you owe on your house.

4. Should you require emergency funds in the future, it can be less costly to borrow from your accumulated home equity rather than withdraw from your RRSPs.

5. Finally, paying off a mortgage sooner than planned also gives many people peace of mind and satisfaction from getting rid of such a large debt.

In a recent Globe and Mail article Kira Vermond writes about how many financial professionals recommend eliminating consumer debt and mortgage debt prior to investing in RRSPs, especially if you expect to be in a higher tax bracket in the future where your unused RRSP contribution room can be put to better use.

Check out First Foundation's mortgage payment calculator to see the difference extra payments will make on your mortgage.

When RRSPs Make More Sense

There are instances where it makes more sense to invest in RRSP's rather than paying down your mortgage. Imagine, you have a mortgage with a 2.7% fixed interest rate. You would earn that rate as a return on the portion of your mortgage which you have paid off. However, if you hold RRSP's which earn more than 2.7% interest, then you would probably be better off investing the money in retirement rather than paying off your mortgage.

In the end, this decision is dependent on which factors are more important to you. Many people wish to retire as early as possible, which means they will need to have decades worth of savings to support their living expenses. In this situation, investing extra money in RRSP's or Tax-Free Savings Accounts might be more beneficial.

Alternative Strategies

There are a couple of alternative strategies where you can both invest in retirement and pay off your mortgage:

1. The simplest strategy would be to invest in your RRSPs first, and utilize your tax refund to make an extra payment on your mortgage.

2. Another strategy, called the Smith Manoeuvre, allows you to get free tax refunds from the CRA while paying your mortgage down faster and building your retirement savings.

At First Foundation, our specialists would be happy to discuss your particular situation and help you decide which options would be best for you. Contact Us today to learn more!

Editor's Note: Originally published May 20, 2010, this post was updated and revised January 20, 2015.

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Pay Off Your Mortgage or Invest in RRSP's?

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May 20 2010 As we quickly approach the March 2, 2015 RRSP contribution deadline for the 2014 tax year, many Canadians may be wondering whether their extra funds should be deposited into an RRSP account or used towards an extra mortgage payment.

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This wall will provide information to help anyone decide whether to put extra money into an RRSP or pay down an existing Mortgage.

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I see this as you can ether invest in your mortgage or RRSP. You can either fully own your house or earn interest on your money and potentially buy a larger, different home in the future.

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The sign post is pointing in three directions, signifying to me three different things that I can invest in with my money. I can put that money into either a mortgage, an RRSP, or a mixture of the two.

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There are a few different factors that someone who is debating on where to invest extra cash, whether it be to invest in their mortgage or their RRSP. These factors include age, income, mortgage rate, your investment rates of return, how much you’ve already invested, and do you have a pension.

I picked this video because I like how it shows that you are capable of investing in both your mortgage and RRSP. The video also posts questions that can show you what you should primarily focus on when making these decisions.

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The Money Mindset Show with Krista Wetmore

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RRSP vs. Mortgage payment, which one to choose?

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RRSP vs. Mortgage payment, which one to choose?

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The video is short however it does have a good point that you will have to pay tax on your RRSP eventually. Thus, it is best to focus on paying off your mortgage. The video didn’t have much to convince me of this however and only really has a man saying to ignore everyone else's advice and just pay off your mortgage.

I think that this video is a good representation of people you should be wary of when deciding on investing in an RRSP or your mortgage. His presentation is not balanced, with pros and cons.

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RRSP v.s Mortgage payment, which one to choose? | Hot Property Online

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This video pertains to the RRSP Home Buyers’ Plan in which it explains how you can take out up to $25,000 to $50,000, on a tax-free basis, towards a down payment on a house. The Home Buyers’ Plan is generally only available for new home buyers. Each person is allowed to put a maximum of $25,000 each towards the homes’ down payment. It is like you are borrowing from yourself.

I believe that the presenter gave the information in a very straightforward and easy to understand manner. Because of this, users of this video can easily understand the benefits of the Home Buyers’ Plan.

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The RRSP Home Buyers' Plan - Mortgage Math #3 with Ratehub.ca

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Is it better to pay off mortgage early or invest? 

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Is it better to pay off mortgage early or invest? 

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By the time you are ready to retire, your house may not be worth as much as it was when you first bought it or as much as you were hoping for. Therefore, you shouldn’t focus solely on it while instead you should invest into your RRSP so that when you are ready to retire do you have actual savings that can support you for the remaining 10 to 30 years of your retired life.

I have included this video on my board because he talks about viewing your house as an investment, not as a home. This is a very impersonal approach to home ownership. I don't like that approach, but it might appeal to some people.

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Is it better to pay off mortgage early or invest? (the answer may surprise you!)

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The five biggest RRSP myths that Canadians can't stop repeating

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The five biggest RRSP myths that Canadians can't stop repeating

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This newspaper article was written by a contributor to the Financial Post. In the article, the writer looks at some of the misconceptions that many Canadians have about investing in their RRSP.

I have included this article because the author does a very good job of highlighting common misconceptions that many Canadians have regarding RRSP and other investment alternatives. These myths include tax consequences of various investments.

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We're almost at the halfway point of "RRSP season." That's the name traditionally given to the first sixty days of each calendar year where Canadians are encouraged to top up our RRSPs to allow us to claim the associated tax deduction on our 2017 tax return, which we will file this April.

But recently, Canadians have been asking some tough questions about whether the RRSP is still a good way to save for retirement. Let me address five of the top RRSP myths we hear on a regular basis.
Myth 1: There's no point investing in an RRSP - you pay all the savings back in taxes when you retire anyway
While this is a fairly popular myth, it's not accurate. Although you do pay tax on RRSP withdrawals, don't forget that you also got a tax deduction upon contribution. If your tax rate is the same in the year of contribution that it is in the year of withdrawal, an RRSP effectively provides a completely tax-free rate of return on your net contribution. And, if your tax rate is lower in the year of withdrawal, you'll get an even better after-tax rate of return on your RRSP investment. In fact, in many cases, even if your tax rate is higher in the year of withdrawal, you are still likely better off with an RRSP than non-registered investments due to the long-term compounding that is effectively tax-free.

Let's take a simple example of Nigel who earns $80,000 annually and contributes $3,000 of his employment income to an RRSP. His marginal tax rate is 33.33 per cent today and he's expected to be the same tax bracket when the RRSP funds are withdrawn. If his investment grows at 5 per cent, by the end of the first year it would be worth $3,150. If he were to then cash in his RRSP, he would net $2,100 ($3,150 less tax of 33.33 per cent).

Now suppose, instead, Nigel preferred not to go the RRSP route and invested his employment earnings in a non-registered account, with the same investment rate of return. This time, he would have to pay tax of $1,000 ($3,000 x 33.33 per cent) on his employment income before investing the net amount of $2,000 in a non-registered account. Growth of 5 per cent would increase the value of his investment by $100 ($2,000 x 5 per cent). If this was cashed in at the end of the year, Nigel would pay tax of $17 ($100 capital gain x 33.33 per cent x 50 per cent taxable capital gain), netting him only $2,083.
Myth 2: It's better to invest in a TFSA than in an RRSP
Many Canadians believe that it is better to invest in a TFSA than in an RRSP, citing that TFSAs are better tax saving vehicles because they are completely tax-free.

If Nigel had invested his after-tax income of $2,000 in a TFSA, after one year at 5 per cent, the value of the TFSA would be $2,100 and this could be withdrawn from the TFSA without tax. Just like the RRSP example above, the end result is $100 of net income or growth. This is equivalent to a 5 per cent tax-free return on the net RRSP/TFSA $2,000 contribution.

The basic rule of thumb is that an RRSP is generally a better choice than a TFSA if you expect to have a lower tax rate in retirement. This is particularly likely if you are a baby boomer in your peak earning years and expect lower income when you are no longer working.

It is true that a TFSA may be a better choice than an RRSP in some cases, such as if you expect a higher tax rate upon withdrawal or will face clawback (repayment) of government benefits. Even so, you may not be able to save enough in a TFSA alone and may also need to supplement retirement savings with an RRSP.
Myth 3: It's better to pay off debt
Paying off high-interest debt should definitely take priority over retirement savings, as it's hard to get an after-tax, guaranteed annual rate of return of 19.99 per cent, a typical credit card rate today. The decision to pay down other debt, such as your low-interest mortgage, at the expense of retirement savings, is often an emotional one that isn't driven by the numbers. With mortgage interest rates at near 60-year lows, albeit rising, neglecting your long-term savings in favour of debt repayment may result in sacrificing the quality of your retirement.
Myth 4: I don't have enough money to save in an RRSP
You don't have to make a huge investment in an RRSP. Making modest contributions on a regular basis can really add up. Suppose you were to invest just $100 each month in an RRSP from ages 30 to 65 and could obtain a long-term, average rate of return of 5 per cent on your investments. In 35 years, you would build up over $114,000 in your RRSP to use for your retirement. Your savings could provide over $9,100 of pre-tax income annually for 20 years to top up your retirement income.

It's easy to set up an automatic savings plan to make regular contributions. Your employer may offer this option, with some employers even making matching contributions on their employees' behalf.
Myth 5: If I save too much in an RRSP or RRIF, there will be a large tax bill when I die
The tax rules require the fair market value of your RRSP or RRIF as of the date of death to be included in income on your terminal tax return, with tax payable at your marginal tax rate for the year of death.

There are exceptions, however, which may allow a tax-deferred rollover to certain beneficiaries, such as a surviving spouse or partner or in some cases, a financially dependent child or grandchild.

Another strategy to minimize income taxes on your RRSP/RRIF at death is to take annual withdrawals from your plan during your lifetime to maximize the income that will be taxed at low rates by forcing additional withdrawals in years you are in a lower tax bracket.
Jamie.Golombek@cibc.com Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice in Toronto.

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The five biggest RRSP myths that Canadians can't stop repeating

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We're almost at the halfway point of "RRSP season." That's the name traditionally given to the first sixty days of each calendar year where Canadians are encouraged to top up our RRSPs to allow us to claim the associated tax deduction on our 2017 tax return, which we will file this April.

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Can I put my mortgage in my RRSP and other burning questions as the deadline looms

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Can I put my mortgage in my RRSP and other burning questions as the deadline looms

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The author is a contributor to the Financial Post newspaper. He is also a CPA and CA. The article goes through a number of tips and tricks relating to RRSPs and mortgage and other investments.

The reason I picked this is because the author goes through a lot of situations that many people have not thought about. One of these situations is putting your mortgage inside your RRSP as an investment. This way, you are getting your RRSP deduction, but paying your mortgage interest to your own RRSP. I though that was kind of clever.

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There are just three weeks left of "RRSP season," meaning that if you want to be eligible to claim a deduction on your 2017 tax return, you need to make your contribution by the March 1, 2018 midnight deadline.

To give you that extra motivation to contribute, here's a few lesser-known tips and tricks that you may wish to consider.
Should I even bother with RRSPs?
In a previous column, I make the case that unless you are in the lowest tax bracket (roughly income under $45,000, depending on your province of residence), then you probably should be saving for retirement using an RRSP. If your tax rate is the same in the year of contribution that it is in the year of withdrawal, an RRSP effectively provides a completely tax-free rate of return on your net contribution. And, if your tax rate is lower in the year of withdrawal, you'll get an even better after-tax rate of return on your RRSP investment. Even if your tax rate is higher in the year of withdrawal, you are still likely better off with an RRSP than non-registered investments due to the long-term compounding that is effectively tax-free.

On the other hand, for those currently in the lowest tax bracket, your tax bracket could only remain the same or be higher in retirement, making a TFSA the better choice than an RRSP, especially if you will face an income-test clawback (repayment) of tax credits or government benefits.

Of course, the numbers don't always tell the full story since TFSAs are much more flexible than RRSPs. TFSA withdrawals can be re-contributed in a future year, while RRSP withdrawals cannot, without using additional RRSP contribution room.
Are spousal RRSPs still relevant given we can pension split via a RRIF?
If you're married or living common-law, you may want to consider making this year's RRSP contribution to a spousal RRSP. That is, an RRSP that belongs to your spouse but to which you contribute.

My view is that if you predict that, upon retirement, you will have either a higher projected retirement income than your spouse or partner or you will have accumulated more retirement assets, it may be more beneficial to contribute to a spousal RRSP than an RRSP in your own name. Here's why.

A spousal RRSP strategy is often used to accomplish post-retirement income splitting since withdrawn funds are generally taxable in the hands of the RRSP owner instead of in the hands of the contributor spouse. If the owner spouse is in a lower tax bracket than the contributor spouse in the year of withdrawal, there may be an absolute and permanent tax savings.

But, even without a spousal RRSP, you have the option of splitting pension income, which is defined to include RRIF withdrawals after age 65, with your spouse or partner. So, why bother with a spousal RRSP?

For two reasons: first of all, spousal RRSPs allow an individual to split more than 50 per cent of your pension income. With a spousal RRSP, one could theoretically "split" up to 100 per cent of RRSP or RRIF income with a lower-income spouse as all the withdrawals would generally be taxed in the hands of the withdrawing spouse.

Secondly, if an individual is under 65, you can't income split RRIF withdrawals. On the other hand, if you had a spousal RRSP, the owner spouse can generally withdraw the funds prior to age 65 and have such withdrawals taxed in the hands of that lower-income spouse.
I've heard I can use my RRSP to help me buy a home, including even holding my own mortgage! But, does it make sense?
Maybe.

You may have heard someone say that they used their RRSP to buy their home. While an RRSP can't actually own real estate, there are two other ways it can be used to facilitate home ownership.

The first is the Home Buyers' Plan (HBP) which allows you to withdraw up to $25,000 tax-free from your RRSP. Your spouse (or partner) may also be able to withdraw $25,000, for a combined total of $50,000 per couple. You generally won't qualify for an HBP withdrawal if either you or your spouse has owned a home in the past five years and occupied it as a principal residence. Amounts withdrawn under the HBP must be repaid over a maximum of 15 years or the amount not repaid in a year is added to your income for that year.

But beyond the HBP is the possibility of using your RRSP to obtain what's known as a "non-arm's length mortgage," which must be administered by an approved lender under the National Housing Act. The interest rate and other terms and conditions must reflect normal commercial practices and you must purchase private or CMHC mortgage insurance.

The advantage of investing in a mortgage through your RRSP is that you are making principal and interest payments regularly to yourself instead of to a third-party lender. But this should be weighed against the costs and risks involved. In addition to the typical one-time mortgage expenses, such as set up costs and legal fees, most approved lenders charge a mortgage administration fee each year. But by far the biggest upfront cost is the mortgage-insurance premium, which can typically range from 0.6 per cent to 4.5 per cent of the amount of the mortgage.

Keep in mind that if you use your RRSP to invest in your own mortgage, your repayments are restricted under the terms of the mortgage, including being liable for early pre-payment penalties.

Be sure to seek financial advice before walking down this route.
Jamie.Golombek@cibc.com Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice in Toronto.

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Can I put my mortgage in my RRSP and other burning questions as the deadline looms

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There are just three weeks left of "RRSP season," meaning that if you want to be eligible to claim a deduction on your 2017 tax return, you need to make your contribution by the March 1, 2018 midnight deadline. To give you that extra motivation to contribute, here's a few lesser-known tips and tricks that you may wish to consider.

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Paying down debt versus contributing to an RRSP

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Paying down debt versus contributing to an RRSP

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This article from Bloomberg News Canada discusses a number of issues relating to the decision to pay down your mortgage as opposed to contributing to an RRSP.

I rather like this article because it talks about why Canadians don't usually see information about paying down their mortgages. This is because the big banks advertise a lot about investing in RRSPs. This is because the banks make money from people investing in RRSPs. Banks don't usually make any money when you pay down your mortgage instead. (They might even lose some.) So the author outlines the good reasons to pay down your mortgage.

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The push is on to get Canadians to lower their 2019 tax bill by contributing to their registered retirement savings plans (RRSPs) before the March 2 deadline. We sure do love those refunds in the spring, but if you're one of the growing number of Canadians mired in debt, those dollars are likely better spent paying it down.

According to Statistics Canada, the average Canadian household owes nearly $1.76 for every dollar it takes in compared with 90 cents in the 1990s. The average non-mortgage debt burden for individual consumers has topped $30,000 according to the Credit Counselling Society.

You wouldn't know that from the glitzy media campaigns from the finance industry that tell you packing more money into your RRSP is the key to a secure financial future. Ignoring debt while promoting investments is a convenient omission for an industry that generates revenue from both ends.

In many cases, paying down debt is clearly the best choice, but you likely won't get that advice from the bank or your advisor.

To determine the best way to deploy your cash, you need to weigh the potential annual return from an RRSP contribution and the risk associated with it against the annual rate of interest on your debt.
RRSP risk-return potential
RRSP contributions can be invested in just about anything, but since RRSPs are long-term savings vehicles, they need to be diversified into an assortment of safe investments for secure and consistent returns. Most advisors would agree a reasonable return expectation for a safe portfolio of investments in an RRSP is between four and eight per cent, depending on the investor's tolerance for risk. Any advisor promising more is either misinformed or lying.

Your chances of higher returns are better if you re-invest your RRSP refund because it can grow tax-free, but those contributions and any returns they generate are full taxed when withdrawn. If you are in the lowest tax bracket when you contribute to your RRSP, the best you can hope for is to withdraw it in the same tax bracket. RRSP contributions result in bigger refunds if you are in a higher tax bracket.
Investing in your debt
Predicting the rate of return from paying down debt is more reliable and much easier. It's whatever interest rate you are paying. Unlike equity investments, the return from paying down debt that would otherwise be compounding over time is guaranteed. Those gains are also tax-free, unlike an RRSP.

In many cases, choosing to pay down debt instead of making an RRSP contribution is a no-brainer. Credit cards charge close to 20 per cent on outstanding balances. Credit cards sponsored by the big retail chains can be as high as 30 per cent. Expecting a 20 or 30-per-cent risk-free or tax-free return on any other investment is simply unrealistic.

Even interest savings from paying down unsecured consumer debt or student loans at nine per cent provides superior returns without the risk or tax consequences.

In terms of risk, the only investment that compares with paying down debt is a guaranteed investment certificate (GIC), and right now, they return about two per cent.

Another factor to determine risk on debt is whether it is a "fixed" or "variable" term. Variable, or floating, rates are indirectly tied to a bank's prime rate and ultimately the Bank of Canada's benchmark rate. Variable rates have been at rock-bottom for a decade and have nowhere to go but up, and that adds an element of risk.
Sometimes it's a toss-up
Believe it or not, there is bad debt and there is good debt. Credit card and consumer debt is generally bad because it's "unsecured" and most often variable. That means there is no collateral, or assets, to back it up in the event of default. Lenders charge higher rates on unsecured debt because they take that risk.

The best examples of secured debt are mortgages and home equity lines of credit because real property is used as collateral. In the event of default, the lender can claim ownership to the borrower's home.

Right now, variable-rate mortgages are comparable with fixed-rate mortgages at about 2.7 per cent for a five-year term. Locking in adds a layer of security.

If your debt is locked in at a low rate, investing inside an RRSP will probably bring a better return than paying that debt down.

If you have high-interest debt and own a home, talk to the bank about rolling it into a low-interest secured loan.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.

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Paying down debt versus contributing to an RRSP: Sometimes it's a no-brainer - BNN Bloomberg

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The push is on to get Canadians to lower their 2019 tax bill by contributing to their registered retirement savings plans (RRSPs) before the March 2 deadline. We sure do love those refunds in the spring, but if you're one of the growing number of Canadians mired in debt, those dollars are likely better spent paying it down.