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A tough choice: Your mortgage, your RRSP or your TFSA?

Have you ever wondered whether it makes more sense to pay off your mortgage, to contribute to a Registered Retirement Savings Plan (RRSP) or to a Tax-Free Savings Account (TFSA)? Perhaps you're expecting to receive some extra money from an inheritance or an employment bonus, and you're not sure which route to take.

The truth is, there is no easy answer. "There are many variables that must be taken into consideration," says Dave Ablett, Director, Tax & Estate Planning, Advanced Financial Planning Support at Investors Group. "You have to determine whether the long-term growth potential of your RRSP and TFSA outweighs the financial advantages of paying down a mortgage."

Here are some factors to consider.

Your age. "When you're young, it is wise to make your RRSP and TFSA contributions a priority," advises Ablett. "The sooner you get money into these types of plans, the longer it will grow on a tax-deferred (or tax-free) basis" But don't overlook the need to build home equity. It can give you a head start on the expenses of moving to a larger home as your family grows.

Your income. The more you earn, the higher the rate of tax you'll pay. That means you must earn more in before-tax dollars to make mortgage payments. If you're a high-income earner, you may want to quickly reduce this expensive debt.

Investment returns. Pay attention to the general rate of investment returns you could reasonably expect to earn when you make your decision. Astute investors could be further ahead saving their money than paying down the mortgage. The benefits are magnified by both an RRSP due to its tax-deferred growth and tax deductions on the contributions and a TFSA because of its tax-free growth and withdrawals.

Your mortgage rate. If your current mortgage rate is low, it may make more sense to contribute to an RRSP or a TFSA. Low borrowing costs at times of good returns for financial markets make a compelling case for contributing.

Unused contribution room? If you have made less than your maximum annual RRSP or TFSA contribution in the past, a lump sum could allow you to catch up. You are allowed to make up for unused contribution room that you've accumulated from past years—which can also generate a healthy tax benefit.

Your pension plan. "Those with generous workplace pension plans that provide for a secure retirement may be able to concentrate on paying down the mortgage without giving up financial security in retirement," explains Ablett.

Before you do anything, speak with your Investors Group Consultant. He or she can examine your personal situation and help you decide which course of action fits your personal circumstances and financial plan.

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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.