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Wednesday, March 29, 2017

RRSP, the Mortgage and Tax

Posted by Tim Stobbs on October 7, 2009

Well since taking on a second job starting in Nov. I’m facing the fact that my original savings goal to pay off the mortgage in about five years could be a bit faster now.  Yet at the same time I’m not entirely comfortable about getting shoved into a higher tax bracket, so should I use some of the new cash to use up some of my unused RRSP contribution room to keep myself out of that tax bracket?

On the surface it does seem like a good idea, but there are some are issues.  The first and more obvious one is perhaps I should save that unused contribution room until after the mortgage is paid off.  After all I’m likely going to be making more money towards the end of my career so that contribution room could be used to save me potentially more tax later on.  Or do you make the contribution and use the refund to further pay down the mortgage?  That’s another classic option.

What is also complicating matters is I’m into reading the fine print on my mortgage agreement to determine if I can actually shove this much cash onto my mortgage in a given year.  I have to confirm with my bank but I suspect I might be limited to about $25,000 in extra payments.  If that is the case then the RRSP starts to become an attractive option once I max out my mortgage pre-payment options.

Sigh, just when things are going along nicely something has to come up and mess it all up again.

Comments

8 Responses to “RRSP, the Mortgage and Tax”
  1. Chris L. says:

    I’m not a big fan of doing things one way just because. I can’t explain it much better than that. If you goal is to be mortgage free, then put the money down even if it makes slightly more sense to contribute to an RRSP. If your mortgage is your biggest priority and motivates you the most then do that. I have never bought an RRSP and know lots of people who have and have seen no increase in value and yet my mortgage (my priority) keeps going down and I save on interest payments all the time. Also I plan to be in a much higher tax bracket going forward and always…I can’t see how other people plan to retire with less income, it just seems backwards. Since I pay down my rentals as well, this also increases my earnings yearly…the less the debt burden on my interest only payments, the more I make every single year. So it’s like getting a raise with the biggest one to come when I’m debt free. So to me, I’d rather pay down my debt toward my retirement than invest in RRSP even if I might pay more taxes. Only a few more years to being totally free beats a few thousand hit on taxes. I’ll have plenty of room to contribute to RRSP’s after I’m financially free…but then why would I? RRSP’s is a weak strategy in my opinion and a tax lour, not always in your benefit. It’s a working stiff strategy.

  2. Chris L. says:

    Also consider that you need to earn cash in hand about 1 million in your lifetime. That means you have to pay taxes on a million (unless it’s held in real estate where taxes are differed…or similar). Bite the bullet now, pay the taxes now and enjoy the benefits of 1 million cash in hand sooner. Just don’t spend the money, save it and put it to work for you. RRSP’s is just a way to tie up funds in a potentially none beneficial way so as to defer payment of taxes…you’ll still need to pay them later and hopefully you aren’t planning to make less money in your retirement…thus pay the taxes now.

  3. Dave says:

    Not a terrible problem to have :)

    You can usually increase your payments up to 25% as well as pay up to a certain percentage of the mortgage down per year, on a 5 year term it’s usually 20% – between those two you may be able to get the mortgage paid off quite quickly.

    Where you put the money depends on how much investment income you think you’ll be withdrawing every year – for myself, I don’t see a lot of income needed (less then I am spending now), so RRSPs make sense because I will be in a lower tax bracket in retirement then I am now from withdrawals.

  4. The Rat says:

    I guess its a personal decision of course, but I always felt a psychological advantage when my principal on my mortgage got smaller and smaller. I think you could still pay more than the 25% on your mortgage if you wanted to, there would just be a penalty charge for doing so. I know with CIBC that was the case.

  5. Jason says:

    Any chance of operating as a family trust? While I work a full time job for a single employer I was able to have my family trust employed rather than me. I income split between me, my wife and my 2 children which works out quite favourably for us at tax time.

  6. Canadian Dream says:

    An update. I confirmed with my bank I can actually pay off more than my $25,000/year, but the problem is it is a bit more complicated than using online banking.

    Thanks for the feedback everyone.

    Tim

  7. The Rat says:

    Glad to hear you can pay off more than the 25k. As mentioned, I know that in my own experience in dealing with CIBC I was able to pay more but with a penalty. And you’re right in that I believe you have to see someone face-to-face such as a mortgage specialist at the bank.

  8. I don’t understand how you can think that an RRSP tax break is not worth it … if you are at the highest tax bracket then you are getting back almost 50 cents on the dollar! Yes, maybe you have to pay it back in taxes in the future, but that’s the future and in the meantime if you make any gains then those gains are magnified by 50%.

    A dollar in your RRSP is an instant 50% return. There is no way you can get that from your mortgage.

    You can run the numbers. I assumed your mortgage was at 5%, your RRSP returned only 2% (you can get 3% with a GIC, so 2% is very conservative) and that your option was to put 10K into either an RRSP or the Mortgage.

    If it goes into the RRSP then you get another $5K refund from taxes to apply against the mortgage.

    I also assumed that when you took the RRSP out at the end of ten year you would get taxed about 30% on it. Even in this very pessimistic view of RRSP returns you are $12K ahead by depositing to the RRSP.

    By depositing to RRSP you end up with a 97K mortgage and a 111K RRSP. By paying down the mortgage you get a 31K mortgage and no RRSP.

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