# Maximize rrsp or pay off mortgage?



## Savingmoney (Dec 28, 2009)

Hi everyone,

I currently still owe 59 000$ on my mortgage at 5.2% and if i give it my all i will be done paying it in 2 to 2 1/2 years. My question is, should i put some money into my rrsp or keep paying down my mortgage. I'm in the 32% tax bracket and i would put the rrsp money in a rrsp savings accout or gic.


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## Toronto.gal (Jan 8, 2010)

As you're so close to paying off your mortgage, I would say pay it off as you don't have several years of missing out on tax-free compounding. Better to become debt free sooner rather than later, especially if your situation allows it.

Good points in this article.
http://www.moneysense.ca/2007/02/14/rrsp-or-mortgage/


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## Dana (Nov 17, 2009)

Pay down the 5.2% mortgage. You will not earn better than that in an RRSP GIC or RRSP savings account. Congrats on being so close to being mortgage-free!


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## Oldroe (Sep 18, 2009)

If you are a young I would do both if you are closer to retirement do both.

Basically you need to build 1 brick at a time.


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## Sampson (Apr 3, 2009)

I think it depends on how deep into your amortization you are. Most of the interest on your initial loan has probably already been paid so its not exactly like you'll be getting a 5.2% tax-free return, it'll likely be much less than that.

Like Oldroe, I'd suggest you do both, hedge both decisions - they are both good, and its impossible to know which is better without a crystal ball and knowing market returns.


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

I would say put some of the money into your mortgage but keep some cash aside too, in case adversity strikes. Even $10K into your 2009 and 2010 TFSA (assuming you haven't already done so) would be a good safety cushion to have, then you could put the rest towards your mortgage, which is costing you 5.2%, quite a bit.

My logic/thinking: If adversity strikes, it would be great if the house is paid but you also need cash (without going into debt) on hand to pay for food, house maintenance, ulitilities, transportation expenses and other life costs.

I suggest this instead of RRSP/GIC simply because 1% seems to be about the best rate of return the average person can count on these days, from those instruments. So the money is more valuable (IMO) as a safety cusion than the little bit of cash you would get in a GIC right now.

Or do you already have a cash rainy day fund?


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## Dr_V (Oct 27, 2009)

A common strategy is to:

- max out your RRSP contribution;
- use the tax rebate that you get as a lump-sum toward the mortgage.

This is (generally) the approach that I employ.


K.


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## leslie (May 25, 2009)

I disagree with Sampson completely. He seems to think the principal portion of the mortgage payment will not 'earn you a return'; that it is only the interest portion of the mort. payment that you will 'save'/'earn'. That is just not so. When you pay down debt your 'return' on the cash equals the rate of interest being charged on that debt.

I also disagree with DrV. Discuss in last point. Of course you have to consider any fees for prepaying the debt.


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## brad (May 22, 2009)

Dr_V said:


> A common strategy is to:
> 
> - max out your RRSP contribution;
> - use the tax rebate that you get as a lump-sum toward the mortgage.
> ...


Ditto here, that's what I do.

In a straight comparison, it's true that you're unlikely to get more than 5.2% anywhere so it would seem like you should just pay off the mortgage. But you have to balance this against the tax advantages of contributing to your RRSP plus the strategic advantage of spreading your eggs among several baskets. 

There's a big psychological hit from paying off your mortgage and you'll feel a lot more freedom without that debt hanging over your head. But if you set yourself a goal to have as least as much money in your RRSP as you have in equity in your house, that'll help balance your risks and keep you focused.


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## brad (May 22, 2009)

leslie said:


> When you pay down debt your 'return' on the cash equals the rate of interest being charged on that debt.


How does this square with the fact that when you first start repaying your mortgage, most of your payment goes toward interest, whereas when you're close to finishing your repayments almost all your payment goes toward principal? 

If I have one year left on my mortgage, I don't think I'm paying 5.2% on the amount that's remaining. The mortgage was for 5.2% over its lifetime, and most of that interest was paid near the beginning, not spread evenly over every payment.

Isn't that right or am I misunderstanding every mortgage calculator I've seen?


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## stephenheath (Apr 3, 2009)

Brad, think of it this way. Let's say you had a simple interest loan of $500,000 at 5% and you pay off $100,000 of principal a year. Basically you'd have:

Year 1: $25,000 interest, $125,000 total payments
Year 2: $20,000 interest, $120,000 total payments
Year 3: $15,000 interest, $115,000 total payments
Year 4: $10,000 interest, $110,000 total payments
Year 5: $5,000 interest, $105,000 total payments

Just like a mortgage, at the beginning a lot more of your payment is interest than principal. In essence, all they've done with the mortgage, is come up with a payment figure so that all 5 years give you identical payments... again, very simplistically, using the above example but making payments of $115,000 each year...

Year 1: $25,000 interest, $115,000 payments, new balance $410,000
Year 2: $20,500 interest, $115,000 payments, new balance $315,500
Year 3: $15,775 interest, $115,000 payments, new balance $216,275
Year 4: $10,800 interest, $115,000 payments, new balance $112,075
Year 5: (fudged to work out since I'm not a mortgage amortization program 
$2,925 interest, $115,000 payments, new balance $0.

In both cases you're still paying 5% on the outstanding principal, you're just paying less principal in the early years and more in the later to make your total payments the same.


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## brad (May 22, 2009)

stephenheath said:


> In both cases you're still paying 5% on the outstanding principal, you're just paying less principal in the early years and more in the later to make your total payments the same.


Ah, now I get it, thanks.


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## Ben (Apr 3, 2009)

Sampson said:


> I think it depends on how deep into your amortization you are. Most of the interest on your initial loan has probably already been paid so its not exactly like you'll be getting a 5.2% tax-free return, it'll likely be much less than that.


This doesn't sound right to me either - perhaps you've not written this the way you intended.

The amount of "return" you earn by making an extra lump sum payment has nothing to do with the principle, either original or current. 

If you put a lump sum prepayment of $5000 toward your mortgage which carries a 5.2% interest rate, then you earn a "return" of 5.2% in after-tax dollars on that $5000. 

This has nothing to do with how deep you are into your amortization. The interest you currently pay for a loan has everything to do with how large it is today, not how large it was yesterday.


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## Sampson (Apr 3, 2009)

Hi all, yeah, I re-read my post and I must have been on glue or something. I'd like to retract the interest/return portion of my statement. 

BUT... I would still like to highlight that I think doing both is a prudent move. It certainly will lead to a sub-optimal return, but at least you hedge the not being in the markets if there are returns greater than your mortgage interest rate.


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## Ben (Apr 3, 2009)

Stay off the glue - bad for me, bad for you. 



Sampson said:


> BUT... I would still like to highlight that I think doing both is a prudent move.


Doing both is a prudent move, for diversification.



Sampson said:


> It certainly will lead to a sub-optimal return, but at least you hedge the not being in the markets if there are returns greater than your mortgage interest rate.


Doing one or the other will not certainly lead to sub-optimal return. Rather, doing one or the other may lead to sub-optimal return. Only hindsight says for sure.


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## leslie (May 25, 2009)

The words 'prudent', 'hedge', 'diversification' obscure reality. The OP must realize that the posts recommending you 'do both' are ignoring your stated alternate investment, and presuming:
* that you will put your money into investments.
* that using debt to leverage investments is a good thing.
* that paying down the mortgage is putting all your eggs in one (RE) basket and therefore bad.

You are not doing the first. And I disagree with the next two.


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## Savingmoney (Dec 28, 2009)

Thanks for everyone's input but i still don't know what to do,i'm 28 years old, i already got my TFSA max out , i got 11 000 in the stock market 4000 in rrsp, 5000 in a saving account, 2500 in checking account. I got more then 3months of living expense so, i don't know????


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## Larry6417 (Jan 27, 2010)

*My 2 cents*

I'm surprised people ask this question so often. The "correct" answer depends how much you value being debt-free vs. increasing your net worth. I'll explain: net worth = assets - liabilities. If you use $1,000 to pay extra on your mortgage (assuming there's no pre-payment penalty) then your debt decreases by $1,000 and your net worth increases by the same amount. If, as Dr Y suggests, you put $1,000 into an RRSP and use the deduction (0.32 X $1,000 = $320) to pay down the mortgage, then your net worth increases by $1,320 rather than $1,000. Therefore, if increasing your net worth is your primary concern then contributing to an RRSP and using the deduction is "best." If being debt-free is more important, then paying down your mortgage is "best."

You say that you can pay down $50K over the next 2 years. I'll assume that you can save ~ $25K per year - a hefty sum. May I suggest that you save as much as possible over 4 years? That way you can still pay your mortgage in 2 years *AND* have ~ $50K in an RRSP in 4 years.


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## Berubeland (Sep 6, 2009)

May I recommend you pay down the mortgage on your residence?

I think this is an awesome idea, I did this myself and my house was paid off by the time I was 30 too 

Since then I have been ill, switched jobs and careers and started a business. They first step to financial freedom is to eliminate/minimize regular monthly payments. 

I lived very well on EI when I was laid off and then when I started my current business. It gives you a lot of options you would not necessarily have if you have to make those payments. 

There is a world of difference between wanting to make money and HAVING to make money.


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## Ben (Apr 3, 2009)

leslie said:


> The words 'prudent', 'hedge', 'diversification' obscure reality. The OP must realize that the posts recommending you 'do both' are ignoring your stated alternate investment, and presuming:
> * that you will put your money into investments.
> * that using debt to leverage investments is a good thing.
> * that paying down the mortgage is putting all your eggs in one (RE) basket and therefore bad.
> ...


Good points. Mea culpa - I had been completely ignoring the OP.

The OP states he would invest in RRSP savings account or GIC. As the rate of return in doing so would certainly be less than than the 5.2% return on paying off the mortgage, I would pay off the mortgage.

I don't think using debt to leverage investments is a good thing. In spite of this, I have a mortgage and still put some money into RRSP's. Admittedly, this is a bit of a contradiction.

With respect to diversification: paying off the mortgage, in the complete absence of any other financial assets to act as an emergency fund, would be foolhardy. One doesn't want to be in the position of having to sell the house just to put food on the table. But, in this case, as the OP has a reasonable cash cushion, I'd pay off the mortgage and ignore any concerns about "eggs in one basket".

The OP is 28 years old. Pay off the mortgage, and then start to accumulate other financial assets. 

The paragraph above very nearly describes my own plans, so I say what I do!


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## Ben (Apr 3, 2009)

Larry6417 said:


> I'm surprised people ask this question so often. The "correct" answer depends how much you value being debt-free vs. increasing your net worth. I'll explain: net worth = assets - liabilities. If you use $1,000 to pay extra on your mortgage (assuming there's no pre-payment penalty) then your debt decreases by $1,000 and your net worth increases by the same amount. If, as Dr Y suggests, you put $1,000 into an RRSP and use the deduction (0.32 X $1,000 = $320) to pay down the mortgage, then your net worth increases by $1,320 rather than $1,000.


This argument doesn't make any sense. True net worth should be calculated in an after-tax context. $1,320 in an RRSP is still only worth $1,000 when you pull it out and put it back in your pocket. So whether you put $1,000 into the RRSP, or $1,000 onto the mortgage, your after-tax net worth is the same. You can't spend pre-tax money.

If we want to include pre-tax RRSP value in our "worth" calculations, then here is my modest proposal: call this "gross worth", not "net worth".



Larry6417 said:


> Therefore, if increasing your net worth is your primary concern then contributing to an RRSP and using the deduction is "best." If being debt-free is more important, then paying down your mortgage is "best."


Increasing net worth on an after-tax basis is best.


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## leslie (May 25, 2009)

Which is another way of stating the error in thinking that "the RRSP tax credit is a value". Cannot be bothered to work through the link provided above (again) that disproves this error in thinking in excruciating detail.

The advice based on the OP is clearly to pay down the mortgage. But the additional information he now gives shows how little emergency fund he has. So the best action given THESE facts is to leave the cash sitting as ready cash for emergencies (especially because he has mortg payments to cover).


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## Ben (Apr 3, 2009)

leslie said:


> The advice based on the OP is clearly to pay down the mortgage. But the additional information he now gives shows how little emergency fund he has. So the best action given THESE facts is to leave the cash sitting as ready cash for emergencies (especially because he has mortg payments to cover).


Agree with this.

1. If the OP wants to know what to do with the cash he already has - the cash he has on hand should stay on hand. 

2. If the OP is asking what to do with "new money", positive future cash flow, this should go toward the mortgage. I had assumed (perhaps incorrectly) that the OP was talking about "new money".

We could also debate the size and the liquidity of his other financial assets and whether this constitutes a reasonable emergency fund, given his life situation, but without knowing more details we can't say. I would tend to direct a few more dollars to the savings account first, before going after the mortgage, but that's just me.


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## Larry6417 (Jan 27, 2010)

Ben said:


> This argument doesn't make any sense. True net worth should be calculated in an after-tax context. $1,320 in an RRSP is still only worth $1,000 when you pull it out and put it back in your pocket. So whether you put $1,000 into the RRSP, or $1,000 onto the mortgage, your after-tax net worth is the same. You can't spend pre-tax money.
> 
> If we want to include pre-tax RRSP value in our "worth" calculations, then here is my modest proposal: call this "gross worth", not "net worth".
> 
> ...


Dear Ben:

I'm not sure you understand the calculation of net worth. Net worth calculators generally use the pre-tax values of pensions, RRSPs, investments, etc. Also, you assume incorrectly that all money removed from an RRSP must be taxed. That's not true in at least 2 cases: the Homeowners Buyers Plan and the lifelong learnong plan. The withdrawals are tax-free as long as they are re-paid within a set time.


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## MoneyGal (Apr 24, 2009)

Well, if net worth calculators use the pre-tax values of RRSPs, pensions, etc., they should at least set up a corresponding tax liability on those pre-tax values.


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## Ben (Apr 3, 2009)

Larry6417 said:


> Dear Ben:
> 
> I'm not sure you understand the calculation of net worth. Net worth calculators generally use the pre-tax values of pensions, RRSPs, investments, etc.


Of course, by convention and for simplicity, net worth calculators do use pre-tax values of all your assets. Being convention doesn't make it right, nor do all of us enjoy simple answers.

As leslie quite succinctly points out, "the RRSP tax credit is not a value". I've only half read the link posted (will read in entirety later), but it is excellent.



Larry6417 said:


> Also, you assume incorrectly that all money removed from an RRSP must be taxed. That's not true in at least 2 cases: the Homeowners Buyers Plan and the lifelong learnong plan. The withdrawals are tax-free as long as they are re-paid within a set time.


I see some good nuance in Leslie's link on this as well. 

The loan is tax-free in the short term under these plans, but one still needs to pay tax on this sum one day down the road when withdrawn and spent. If not you, then your estate (at a wicked marginal tax rate).

Again, an RRSP contribution does nothing to increase your after-tax net worth. Before-tax net worth is a placebo that makes people feel better about their wealth than they should.


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## Larry6417 (Jan 27, 2010)

MoneyGal said:


> Well, if net worth calculators use the pre-tax values of RRSPs, pensions, etc., they should at least set up a corresponding tax liability on those pre-tax values.


Unfortunately, you have to do that yourself. Calculating capital gains etc varies enormously depending on your tax bracket and where you live.


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## MoneyGal (Apr 24, 2009)

Der. I know. 

I haven't ever used a pre-packaged NW calculator. 

However, I do, from time to time, calculate my net worth. Because I relate to it as a snapshot of a moment in time, I calculate and include the estimated tax due if all assets were sold/deemed to be disposed of on that day. 

My point was just that if you are going to rely on pre-tax estimates of the value of some asset, you must set up a corresponding tax liability against the asset if applicable (not principal residence, for example). 

In fact, I even manage my open investments in this way - calculating the allocation taking tax into account, and I don't know anybody else who does this.


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## Larry6417 (Jan 27, 2010)

Ben said:


> Of course, by convention and for simplicity, net worth calculators do use pre-tax values of all your assets. Being convention doesn't make it right, nor do all of us enjoy simple answers.


Actually, convention does make use of pre-tax values, so it is "right." We may debate the value of net worth, but that is how it's calculated.


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## Larry6417 (Jan 27, 2010)

Ben said:


> Again, an RRSP contribution does nothing to increase your after-tax net worth. Before-tax net worth is a placebo that makes people feel better about their wealth than they should.


That assertion depends on the assumptions that you make, something the article you refer to makes quite clear - something you fail to mention. It assumes that you retire and receive your RRSP at the same tax rate. If you do, then I agree there's little benefit. If you plan well and are at a lower tax rate when you withdraw from your RRSP then there is a benefit to the tax deferral - something the article makes quite clear. Also, you can convert your RRSP to a RRIF and take out larger amounts when you know your tax rate will be low. Most of the people on this forum would be savvy enough to do that.

You extrapolate far too much: "RRSPs don't increase after-tax net worth." As I state above, and as the article itself states, that depends on the assumptions that you make.

The article really says nothing new. About 10 years ago my accountant and I discussed whether I should continue investing in an RRSP. RRSPs convert capital gains such that they are taxed like interest income. Therefore, investing in equities outside an RRSP and using an investment loan for a tax deduction was discussed. Ultimately, I decided to continue doing both. Because of the aging of Canada I thought that governments would be very wary of changing the rules on RRSPs while they may be less reticent changing the rules for non-registered investments. Also, I've seen Derek Foster advocate using an investment loan and investing in equities as an alternative to RRSPs for at least 5 years.


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## MoneyGal (Apr 24, 2009)

This may be an appropriate place to throw in this link: C.D. Howe Institute says for most people, TFSAs are a better way to save for retirement than RRSPs - if you consider marginal effective tax rate.


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## Larry6417 (Jan 27, 2010)

MoneyGal said:


> This may be an appropriate place to throw in this link: C.D. Howe Institute says for most people, TFSAs are a better way to save for retirement than RRSPs - if you consider marginal effective tax rate.


Thanks for the link, MoneyGal. Actually what I gleaned from the article is that it depends on your marginal tax rate at retirement. If your marginal rate at retirement is equal to your MTR when working then TFSA = RRSP. If your MTR is lower in retirement then RRSP is superior. If your MTR is higher in retirement then TFSA is superior. The article also mentions that Albertans close to retirement are better off in a TFSA because of the low tax rate.


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## Ben (Apr 3, 2009)

Larry6417 said:


> Actually, convention does make use of pre-tax values, so it is "right." We may debate the value of net worth, but that is how it's calculated.


In the Dark Ages, the world was flat, by convention. Did that make it right?



Ben said:


> Again, an RRSP contribution does nothing to increase your after-tax net worth. Before-tax net worth is a placebo that makes people feel better about their wealth than they should.





Larry6417 said:


> That assertion depends on the assumptions that you make, something the article you refer to makes quite clear - something you fail to mention. It assumes that you retire and receive your RRSP at the same tax rate. If you do, then I agree there's little benefit. If you plan well and are at a lower tax rate when you withdraw from your RRSP then there is a benefit to the tax deferral - something the article makes quite clear. Also, you can convert your RRSP to a RRIF and take out larger amounts when you know your tax rate will be low. Most of the people on this forum would be savvy enough to do that.
> You extrapolate far too much: "RRSPs don't increase after-tax net worth." As I state above, and as the article itself states, that depends on the assumptions that you make.


No. You extrapolated what I said.

Here’s what I said: “An RRSP contribution does nothing to increase your after-tax net worth.” If I make an RRSP contribution today, and calculate today my after-tax net worth, then I will find that my RRSP contribution did not increase my after-tax net worth. Simple as that.

I’ll paraphrase what you said in response: “An RRSP contribution, followed by a subsequent withdrawal at lower marginal tax rate, would increase your after-tax net worth.” This is obvious – indeed, the majority of people on this forum would be savvy enough to know this. But, this does not rebut my statement in any way.

But let’s get back to your original statement that kicked all of this off.



Larry6417 said:


> The "correct" answer depends how much you value being debt-free vs. increasing your net worth. If you put $1,000 into an RRSP and use the deduction (0.32 X $1,000 = $320) to pay down the mortgage, then your net worth increases by $1,320 rather than $1,000. Therefore, if increasing your net worth is your primary concern then contributing to an RRSP and using the deduction is "best." If being debt-free is more important, then paying down your mortgage is "best."


Let’s look at this from 2 angles: the emotional view, and the “dollars in your pocket that you can spend” view. 

Emotional view: 

1.	Contribute to the RRSP, use net worth calculator in “conventional” (therefore right!) sense, and voila, this might make one happier because your “net worth” is higher than if you had used those funds to pay down the mortgage.
2.	Or, pay down the mortgage and have less debt. Who isn’t happy with less debt?

You approach this from the emotional angle in your statement, and leave it up to the OP to decide which will make him happy. This is a perfectly human and valid way to frame the choice, but not the way to show whether the OP has more dollars in his pocket.

“Dollars in your pocket that you can spend” view, ie. The financial view: 

1.	Contribute to the RRSP savings account or GIC, as the OP has said, and get the tax deduction on RRSP contribution. If the OP will be in a lower tax bracket when he withdraws the money, then he does stand to gain on the tax side down the road. However, the amount of money he actually can spend today, in after-tax dollars, is unchanged. The OP earns perhaps 2% on the funds contributed, and this return will be taxed one day, bringing it down to say 1.4% return after-tax.
2.	Pay down the mortgage. This earns 5.2% on an after-tax basis. This is far superior to 1.4%, and on a strictly dollars and cents basis, this is the way to go.

You did not frame your response in the financial view, but rather chose the emotional view. The “financially correct" answer is strictly dollars and cents. The “emotionally correct” answer depends how much you value being debt-free vs. increasing your “placebo” net worth.

Ah well, perhaps we get hung up on the details.

OP, pay down your mortgage, but first give some thought to whether you have enough cash on hand to handle various emergencies.


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## Ben (Apr 3, 2009)

Larry6417 said:


> Thanks for the link, MoneyGal. Actually what I gleaned from the article is that it depends on your marginal tax rate at retirement. If your marginal rate at retirement is equal to your MTR when working then TFSA = RRSP. If your MTR is lower in retirement then RRSP is superior. If your MTR is higher in retirement then TFSA is superior. The article also mentions that Albertans close to retirement are better off in a TFSA because of the low tax rate.


For low income earners, be careful of reducing your GIS benefit, and for high income earners, be careful of full or partial clawback of OAS.

Using TFSA's strategically can be useful in either case.

http://www.theglobeandmail.com/globe-investor/personal-finance/rrsp/tfsas-rrsps-or-both/article1443393/


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## Larry6417 (Jan 27, 2010)

Ben said:


> As leslie quite succinctly points out, "the RRSP tax credit is not a value". I've only half read the link posted (will read in entirety later), but it is excellent.
> 
> Again, an RRSP contribution does nothing to increase your after-tax net worth.


Ben, I'm not extrapolating what you said. I'm stating exactly what you said. Your argument relies on your belief that RRSPs don't increase after-tax worth. That's true in cases where your marginal tax rate in retirement and while working are the same. If your MTR in retirement is lower then you DO increase your after-tax worth. You said, without qualification, that RRSP contributions don't increase after-tax worth.


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## Larry6417 (Jan 27, 2010)

Ben said:


> In the Dark Ages, the world was flat, by convention. Did that make it right?


A truly absurd comment. A senior member ought to have more class than that.


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## Berubeland (Sep 6, 2009)

*A senior member ought to have more class than that.*

FYI The way you get to be a senior member is to post a lot... there are no other requirements. So we just have fast fingers rather than amazing intellect or any other qualification.

Except for me I'm a senior member because I'm awesome


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## Larry6417 (Jan 27, 2010)

Berubeland said:


> *A senior member ought to have more class than that.*
> 
> FYI The way you get to be a senior member is to post a lot... there are no other requirements. So we just have fast fingers rather than amazing intellect or any other qualification.
> 
> Except for me I'm a senior member because I'm awesome


Thanks for the clarification.


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## Ben (Apr 3, 2009)

Larry6417 said:


> Ben, I'm not extrapolating what you said. I'm stating exactly what you said. Your argument relies on your belief that RRSPs don't increase after-tax worth. That's true in cases where your marginal tax rate in retirement and while working are the same. If your MTR in retirement is lower then you DO increase your after-tax worth. You said, without qualification, that RRSP contributions don't increase after-tax worth.


Well, hopefully some people will understand what I mean when I say: “An RRSP contribution does nothing to increase your after-tax net worth.” If I make an RRSP contribution today, and calculate today my after-tax net worth, then I will find that my RRSP contribution did not increase my after-tax net worth. That’s all.

It has to be made clear to people that the RRSP contribution in and of itself is not a net value. When someone puts $1,000 into an RRSP and finds themself with net worth of $1,320, they are no richer on that day than they would have been had they put $1,000 onto the mortgage, in spite of what the net worth statement says. I think we can both agree on this. Yes, they may be richer on a future day by virture of lower tax rates on withdrawal.



Ben said:


> In the Dark Ages, the world was flat, by convention. Did that make it right?


I talked to a doctor recently who recounted what she had been told in medical school: “50% of what we teach you here will be proven false by the time you retire.”

Perhaps, when we retire, net worth measurement convention will have evolved to calculate on an after-tax basis. 

That’s all I mean. No need to infer I have no class. Now I’m a little hurt. 



Berubeland said:


> *A senior member ought to have more class than that.*
> 
> FYI The way you get to be a senior member is to post a lot... there are no other requirements. So we just have fast fingers rather than amazing intellect or any other qualification.


True! My qualification is that I took Grade 9 typing class.



Berubeland said:


> Except for me I'm a senior member because I'm awesome


Finally, something we can all agree on!


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## Berubeland (Sep 6, 2009)

There are a couple of benefits to RRSP's

One is that you can lower your marginal tax rate today depending on how much you can contribute and your salary.

The other major benefit is that the gains get to compound tax free year after year. 

Plus there are other benefits such as the housing down payment program

There is no doubt the TFSA's have completely changed the game. For myself I will definitely not use a RRSP at all I am pretty poor as things go and have a lot of deductions (my hubby and son) the savings I contributed to my RRSP I did not even claim yet. The TFSA is perfect for me. I can take my money in case of emergency. For people with more income or savings fill up the TFSA then the RRSP. Then unregistered investments you don't want the government taking away your compounding interest unless you have to.


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## Larry6417 (Jan 27, 2010)

Ben said:


> It has to be made clear to people that the RRSP contribution in and of itself is not a net value. When someone puts $1,000 into an RRSP and finds themself with net worth of $1,320, they are no richer on that day than they would have been had they put $1,000 onto the mortgage, in spite of what the net worth statement says. I think we can both agree on this. Yes, they may be richer on a future day by virture of lower tax rates on withdrawal.


What you mean is not actually what you said. You said that RRSPs did not increase after-tax value period. Then you referred to an article that claimed that long-term investment in an RRSP fared no better than investing in a non-registered investment (true if MTRs in retirement and work are the same). Therefore, I assumed that you were referring to future values, not just present. 

Also, you assume that money taken out of an RRSP is always taxed at that person's MTR. That's not always true. The homeowner's buyers plan and life-long learning plan allow people to withdraw tax-free, if the withdrawals are repaid in a set time. For example, if one pays down $1,000 towards a mortgage, then that person has $1,000 less debt. If someone puts $1,000 into an RRSP and pays the $320 refund onto a mortgage (assuming a 32% MTR), then that person has $320 less debt and $1,000 after-tax available through the HBP or life-long learning plan.


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## Ben (Apr 3, 2009)

Well, I have to guess that we are boring people by now. Probably no value going around in circles anymore dissecting what we meant, thought we meant. In any event, it's been an interesting discussion.

Welcome to the forum Larry. Your thoughts are welcome here, and by good discussion hopefully we all learn to see things from different angles.


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## Larry6417 (Jan 27, 2010)

Ben said:


> Well, I have to guess that we are boring people by now.


What do you mean "by now." We (by _we_ I mean _I_) have been boring people for a long time now! 

I reviewed some of the original posts and found that I missed a crucial detail: the OP wanted to invest in GICs for his RRSP. In the OP's specific circumstances I was clearly wrong (a not uncommon occurence ), and you were clearly right. Investing in an asset yielding 1% makes no sense when carrying debt costing 5%. That's like buying a CSB while holding credit card debt. I assumed, incorrectly, that the OP would invest more aggressively because of his youth. Moshe Milevsky's rule of thumb is that contributing to an RRSP beats paying down the mortgage if the rate of return in the RRSP is ~ 2% greater than the interest rate on the mortgage.


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## MoneyGal (Apr 24, 2009)

Another Milevsky fan! Nice to see it isn't just me.


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## ssimps (Dec 8, 2009)

Berubeland said:


> *A senior member ought to have more class than that.*
> 
> FYI The way you get to be a senior member is to post a lot... there are no other requirements. So we just have fast fingers rather than amazing intellect or any other qualification.


Exactly, just look at me and my senior member status. 

back to OP Q:

IMO, pay the mortgage off; if you have only a few years left, you must have equity in the house, so you should be able to get a LOC with low interest based on the house equity. Use the LOC as your emergency fund if and ONLY if an emergency occurs. Why have $ sitting in cash making nothing in case of an 'emergency'; to me emergencies are not that likely, but maybe I've been lucky so far.


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## Larry6417 (Jan 27, 2010)

MoneyGal said:


> Another Milevsky fan! Nice to see it isn't just me.


Gasp! You mean there are people who aren't Milevsky fans!?!

I reviewed _Money Logic_. I oversimplified what Milevsky said. He assumed that marginal tax rates while contributing and withdrawing from an RRSP are the same. He found that it was a tie if the interest rate on the mortgage and the rate of return in the RRSP are the same. Of course, the interest rate of the mortgage, at least for the term of a fixed mortgage, is known while the investment return is unknown. Long-term equity returns are in the 8-10% range, so at a mortgage rate of 8% or higher, the decision is a no brainer for me: pay the mortgage. Why forgo a sure 8% return for a possible 8-10% return? Even at 7% mortgage rates most would say pay down the mortgage. If the rate of return of the RRSP is 1% higher then there is a marginal advantage to the RRSP. At 2% the advantage becomes substantial, so 2% isn't Milevsky's rule of thumb; it's mine.

Of course, changes in the future can make a huge difference. If your future MTR is lower than when contributing, that can sway the advantage towards an RRSP. Of course, the converse is also true. 

Basically, the lower the interest rate on the mortgage, the more likely it is that the RRSP will outperform. Again, the converse is true. I've come to the conclusion that paying down the mortgage vs. contributing to an RRSP depends on your risk tolerance. The more risk averse you are, the more likely you will favour paying down debt. Present mortgage rates are at historic lows, so the math, according to Milevsky, favours contributing to an RRSP. Of course, there's huge volatility in that strategy. People who contributed to an RRSP over paying down the mortgage fared very poorly in 2008. However, those who did the same in 2009 are likely far ahead. You can get a 3 yr fixed term mortgage for 3.49% from ING. Theoretically, you could buy a strip bond for your RRSP, matched to the term of your mortgage, for ~ 5%. That way your nominal investment returns are known, and you'll come out ahead according to Milevsky. But that may be getting fancy-shmancy for most people.

Milevsky rejects dogmatic answers; I agree. Paying down debt is never the worst thing to do, but it's not necessarily the best thing to do if your goal is to accumulate wealth.

Milevsky also brings up an important point that no one else has mentioned in this thread: diversification. By paying down the mortgage, you concentrate your wealth into one asset: your home. By contributing to an RRSP, you diversify your assets.


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## MoneyGal (Apr 24, 2009)

Milevsky's latest popular finance book has a whole chapter on the housing purchase decision. In it, he delves deeper in the question of the timing of a house purchase and housing as a concentrated investment. But it probably isn't an argument you've heard before.


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## Larry6417 (Jan 27, 2010)

MoneyGal said:


> Milevsky's latest popular finance book has a whole chapter on the housing purchase decision. In it, he delves deeper in the question of the timing of a house purchase and housing as a concentrated investment. But it probably isn't an argument you've heard before.


Thanks for the link, MoneyGal. I'll definitely look at it.


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## Jungle (Feb 17, 2010)

I have been reading this thread. What I like that's been already mentioned is:

Having more available income for new investments is a huge benefit (once mortgage is paid)
Tax deferred money DOES compound inside the RRSP..

I too am debating on cutting the RRSP contributions to hammer the mortgage down faster. Not an easy choice for me either.


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