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RRSP versus Paying down your Mortgage?

I believe that for most the answer is both.  In meeting with clients one of the most celebrated financial accomplishments for many is when they are finally debt free.  Saving outside of the mortgage in an RRSP offers diversification.  Too often if you save only in the home, it often means borrowing against the home or selling it to fund retirement.  If you choose both, paying down the mortgage and contributing to your RRSP you end up with a home and funds to draw from in retirement.

If you want a more math based answer it can be found in my previous post (TFSA Versus RRSP), paying down your mortgage for tax reasons can be compared to a TFSA, no tax benefit on the money in, no tax on the money out (usually), and no tax on the interest saved.

I believe the answer to this question lies in your ideal balance.  Some people need more money saved to be comfortable, others feel more comfortable with less debt.  The second consideration is how you spend.  If you buy a more expensive home every time you have a little equity, RRSP’s would likely provide a bigger retirement savings.  If you are likely to pay you home down quickly, and then stay there while building your savings then your balance may be towards paying down debt.  The third consideration is what would make you feel more successful, I find the more we do that makes us feel successful, the more success we tend to have.

RRSP’s have one other advantage; the courts have ruled that an RRSP can be creditor protected.  There are criteria that need to be met for this.  This can make a big difference if you ever find yourself in bankruptcy.

With current interest rates so low, I feel paying down debt is more important than ever.  If you choose to pay $500 a month into an RRSP, you will never be forced to increase this and could stop the RRSP payment if things change.  This contrasts a mortgage where every time your mortgage comes up for renewal, or with a variable ever time the rates change you risk a larger mortgage payment, and you cannot simple choose not to pay the mortgage in most circumstances.  Paying down your mortgage protects you if interest rates rise, or life requires you to lower your expenses.

Whichever you choose, saving money and building net worth will only make your financial life easier.  Saving with the wrong option is better than not saving at all.  The best way to choose which is right for you is through a conversation with a professional advisor.

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RRSP versus TFSA

Now with the TFSA (Tax Free Savings Account) and the RRSP (Registered Retirement Savings Account) I have seen both win the title of “the best”, so which one is it?

These two accounts are very similar, both give you a limit on contributions, both allow your investments to grow without tax and both have a long list of different investment options.  The biggest difference is in when you receive the tax benefits or with RRSP’s potentially the bill.

With a TFSA when you contribute there is no tax savings, but when you pull the money out it is all tax free.

With an RRSP when you contribute you can deduct the contribution from your taxable income, but when you pull the money out the entire withdraw is taxable.

For short term savings the TFSA usually makes more sense.  For long term savings they both offer benefits.  To maximize the benefit a general rule is if you will have more taxable income in retirement the TFSA should work better.  If you will have a smaller taxable income in retirement then the RRSP will likely be the better option.  It is also important to remember it is not RRSP or TFSA question, in many cases using them both for different reasons makes the most sense.

Whichever option you choose, saving money and building net worth will only make your financial life easier.  Saving with the wrong option is better than not saving at all.

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