# RRSP, TFSA, MTG - What is the priority sequence?



## sunmoney (Oct 11, 2010)

Hi All, I'm brand new to investing, but I'm excited about it. We don't have a lot of savings at the moment, but my wife and I have committed to saving as we want to actually retire some day!

We a have a lot of contribution room in our RRSP and TFSA. As well, we have a large mortgage. My question is, what is the basic strategy when putting the money into these 3 things? 

I recall reading somewhere on http://www.milliondollarjourney.com/ that we should:

Top up RRSP 
Then mortgage
Then external investments. 
I'd assume topping up TFSA is goes to the top of this list.

Is this generally correct?


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## FrugalTrader (Oct 13, 2008)

It really depends on your situation. What is your mortgage rate? What is your balance? What is your marginal tax rate? How close are you to retirement? Do you have a defined benefit pension? Does your spouse?


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## the-royal-mail (Dec 11, 2009)

In my opinion, you need to establish the 3-tiers of rainy day savings before you do anything else. Please read up on this and let us know what you think.


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## m3s (Apr 3, 2010)

For me it's TFSA, RRSP, non reg investments, mortgage. They're all pretty close and if anything I would want a mix due to future unknown rates. I'm comfortable with no rainy day funds as I have a empty LOC and job security


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## KaeJS (Sep 28, 2010)

mode3sour said:


> For me it's TFSA, RRSP, non reg investments, mortgage. They're all pretty close and if anything I would want a mix due to future unknown rates. I'm comfortable with no rainy day funds as I have a empty LOC and job security


Exactly the same for me. But, I think I'd throw Savings in there between RRSP and Non-Registered.

TFSA, RRSP, Savings, Non-Registereds, Mortgage


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## slacker (Mar 8, 2010)

Is there any disadvantage to doing a bit of everything? A kind of diversification? Given that any decision you make today is base on imperfect information, and subject to future investment returns, future interest rates, and changes in tax laws.


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## HaroldCrump (Jun 10, 2009)

I try to do a bit of everything.
If you pour everything into investments, there may not be any left for paying off mortgage faster.
Unless you are making phenomenal returns on your investments, that's probably losing you money in the longer run.
Similarly, if you pour everything down into the mortgage, you have very little emergency fund left and no investments.


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## GeniusBoy27 (Jun 11, 2010)

To me, I work out the math and maximize where the savings/gains are greatest.

Insurance (life and disability) is a primary concern, because any potential loss of income can be devastating.
RRSP makes absolute sense at my marginal tax rate of 46%.
TFSA's provide tax free coverage.
Investments/savings next.
Then mortgage.

But I figured out the pros/cons of each. Some investments may be more valuable than RRSPs, etc., at a specific point in time.


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## sunmoney (Oct 11, 2010)

Thanks for all of your responses. Obviously I still have a lot to learn about. But I'm starting to get a sense for it. 

I never thought about having a rainy day fund and I certainly should. 

I also own and operate a small business which I believe ties into things like life insurance and investments. It still seems a very complex. So many options and implications. Is there such thing as an OBJECTIVE financial advisor - one who sells only their advice and doesn't get commissions (or kickbacks)?


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## andrewf (Mar 1, 2010)

I'd make the argument that if you plan to buy any bonds/GICs, even within the RRSP/TFSA, it probably makes sense to repay the mortgage instead. Bond yields are pretty low, and probably worse after tax than repaying the mortgage.


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## Sampson (Apr 3, 2009)

andrewf said:


> I'd make the argument that if you plan to buy any bonds/GICs, even within the RRSP/TFSA, it probably makes sense to repay the mortgage instead. Bond yields are pretty low, and probably worse after tax than repaying the mortgage.


I'd argue against this.

2009 was a perfect example of the utility of diversified asset allocation.

Bonds were up during mid-2009, re-balancing at that time would have moved your monies into equities, which over the past 2-3 years (in this low interest rate environment), would have produced returns on that money easily in the 20% mark.

Depending on the size of your mortgage and your investments, the gains reaped during this period could offset any interest paid against the mortgage. I'm not arguing that the above is always the case, but I would argue that an all-or-none strategy (no bonds) can have much higher risks of being the under performing strategy. 

I buy bonds not to maximize return, just to reduce risk and provide access to capital if opportunity arises.


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## andrewf (Mar 1, 2010)

By repaying your mortgage you increase your equity, which can then be drawn on to 'rebalance' into equities. I see your point, but another way to think about it is to look at repaying the mortgage as buying a bond that yields what you pay on your mortgage tax-free and carries no risk of default. You can rebalance by 'selling' some of your position in your mortgage by refinancing or using a LOC and investing in equities. 

Bonds have given a lot of capital appreciation in the past, but that bull market is about at its peak. Yields can't go below zero, so the potential for future gains is limited. And investing is longer duration bonds is substantially riskier than repaying your mortgage. I'm not saying that this is the only way to approach it, but offering a different perspective.


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## MoneyGal (Apr 24, 2009)

^ This.


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## crazyjackcsa (Aug 8, 2010)

The question is far too dependant on how much you make, how much you earn and how old you are.

I would put it Mortgage, TFSA and RRSP. My family gross income is about $57,000 (with two incomes and two children and I'm 30 years old with 90k left on the mortgage). 
Protecting what we do bring in is more important than potential gains.


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## dilbert789 (Apr 20, 2010)

Since this depends so much on your income how about this situation:
~60k/yr so I think it's about a 32% tax range.

$10k to place somewhere

- more than 10k in RRSP room
- 215k mortgage @ 5.4%
- 15k LOC (not HELOC, can't get one quite yet) @ 5% - vehicle

What gets the better after tax return?
a) pay down the mortgage as it has a higher rate. When our term is up in a couple of years we should be able to get a HELOC and put the LOC balance on there. If the LOC rate goes above the mortgage, pay the LOC instead.
B) split between mortgage and LOC
C) Put it all into RRSP's, drops my taxable income to 50k, take the ~3200 I get back, put on mortgage or LOC, whatever has a higher rate.


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## Eclectic12 (Oct 20, 2010)

sunmoney said:


> [ ... ]
> 
> Top up RRSP
> Then mortgage
> ...


In general ... yes. However, IMHO part of setting the priorities is evaluating what the costs are versus what you think you can make and what you are comfortable with.

For example, if the only investments you are comfortable investing in pay 2% while your mortgage is at 6%, then likely the mortgage makes more sense as
external investments will be taxed so that to get the same benefit, your
investment would have to earn better than 6% + the taxes.

Bear in mind that your comfort level will likely change as you learn more about what different investments are available, what the tax implications are and how the markets operate.

In a way, it's similar to when I recommended Research In Motion to my co-worker around March 2009. He hadn't been watching it and was convinced that the iPhone had killed the BlackBerry. Meanwhile, having watched RIM for years go through similar concerns, I was quite content to buy at about $50 and sell for about $80.

Welcome to the wonderful world of finance and investing ...


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## ShowMeTheMoney (Apr 12, 2009)

It depends also on what you're planning to invest RRSP funds in. But the sure bet is to pay down the mortgage, a 5.+% guaranteed after tax return is damn good these days.


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