A tough choice: Your mortgage or your RRSP?
Have you ever wondered whether it makes more sense to pay off your mortgage or to invest in a Registered Retirement Savings Plan (RRSP)? 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, Manager, Advanced Financial Planning Support at Investors Group. "You have to determine whether the long-term growth potential of your RRSP 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 a priority," advises Ablett. "The sooner you get money into a sheltered retirement plan, the longer it will grow on a tax-deferred 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 investing their money than paying down the mortgage. The benefits of investing are magnified by an RRSP, with tax-deferred growth within the plan and the tax deductions on the contributions.
Your mortgage rate. If your current mortgage rate is low, it may make more sense to invest in an RRSP. Low borrowing costs at times of good returns for financial markets make a compelling case for investing.
Unused RSP contribution room? If you have made less than your maximum annual RSP 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 suits your financial circumstances and objectives.
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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.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
