Personal Finance

RRSP or Pay Down Mortgage?

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  • Feb 22nd, 2017 2:38 pm
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[OP]
Deal Addict
Mar 21, 2013
4426 posts
6941 upvotes
Canada

RRSP or Pay Down Mortgage?

Hi all,

My wife and I have a goal of paying off our mortgage by the end of 2018, when the term is up. Our payments are currently doubled and by my calculations we need to save another $117,000 on top of that before that time in order to succeed. I want to know your thoughts on paying into RRSP vs saving for paydown of the mortgage.

She makes $133k and has a defined benefit pension, as well as a matching savings plan that has her RRSP pretty much maxed. We both have almost full TFSA's. I have nothing in RRSP and work two jobs, one is a yearly contract and the other commission. I had my best year ever in 2016 and made about $152k.

Just doing taxes and looking at allocating. I was looking at putting about $27k into an RRSP index fund to lower my tax bracket. I would get about $10,500 back, so that would create a higher mountain to climb on the mortgage front. This could prevent us from reaching our goal on time.

Am I being crazy? We want to start a family in 2019 and love the idea of having cash flow freedom.
18 replies
Deal Expert
Aug 22, 2011
37038 posts
23003 upvotes
Center of Universe
My thought on RRSP is to maximize when you're at your "highest" earning years and at $100k+, that's the perfect time.
Deal Fanatic
Nov 22, 2015
6378 posts
6213 upvotes
Blubbs wrote: Hi all,

My wife and I have a goal of paying off our mortgage by the end of 2018, when the term is up. Our payments are currently doubled and by my calculations we need to save another $117,000 on top of that before that time in order to succeed. I want to know your thoughts on paying into RRSP vs saving for paydown of the mortgage.

She makes $133k and has a defined benefit pension, as well as a matching savings plan that has her RRSP pretty much maxed. We both have almost full TFSA's. I have nothing in RRSP and work two jobs, one is a yearly contract and the other commission. I had my best year ever in 2016 and made about $152k.

Just doing taxes and looking at allocating. I was looking at putting about $27k into an RRSP index fund to lower my tax bracket. I would get about $10,500 back, so that would create a higher mountain to climb on the mortgage front. This could prevent us from reaching our goal on time.

Am I being crazy? We want to start a family in 2019 and love the idea of having cash flow freedom.
$150K+ income? You'd be crazy to not do your RRSPs first.
Deal Fanatic
Nov 24, 2013
6241 posts
2987 upvotes
Kingston, ON
Blubbs wrote: She makes $133k and has a defined benefit pension, as well as a matching savings plan that has her RRSP pretty much maxed. We both have almost full TFSA's. I have nothing in RRSP and work two jobs, one is a yearly contract and the other commission. I had my best year ever in 2016 and made about $152k.

Just doing taxes and looking at allocating. I was looking at putting about $27k into an RRSP index fund to lower my tax bracket. I would get about $10,500 back, so that would create a higher mountain to climb on the mortgage front. This could prevent us from reaching our goal on time.
While I understand wanting to be 'mortgage free,' you also don't want to be penny-wise, pound-foolish.

http://www.taxtips.ca/taxrates/ab.htm

With AB marginal rates, I'd consider putting ~$12K in RRSP contributions. You'd get 42% (~$840) back on the first ~$2K, and 41% (~$4,100) back on the next ~$10K. Once you hit the 38% bracket (26% Fed + 12% AB) at $140K taxable income, stop, and put the rest against your mortgage. Should be a good balance of the two goals (optimizing tax and paying down mortgage).

You'd end up with $12K in the RRSP, and still have $15K cash + ~$5K tax refund coming = $20K to put to the mortgage.
Deal Fanatic
Aug 25, 2005
5316 posts
2449 upvotes
depends on what you're doing with your RRSP. I've been tracking a basic couch potato portfolio (20% XIC, 40% XWD, 40% XBB). In the last 12 months, its up about 10% and up 52% in the last 5 years (and that's not even including DRIP). so the choice would've been easy. but obviously, none of this is guaranteed.
[OP]
Deal Addict
Mar 21, 2013
4426 posts
6941 upvotes
Canada
Mike15 wrote: While I understand wanting to be 'mortgage free,' you also don't want to be penny-wise, pound-foolish.

http://www.taxtips.ca/taxrates/ab.htm

With AB marginal rates, I'd consider putting ~$12K in RRSP contributions. You'd get 42% (~$840) back on the first ~$2K, and 41% (~$4,100) back on the next ~$10K. Once you hit the 38% bracket (26% Fed + 12% AB) at $140K taxable income, stop, and put the rest against your mortgage. Should be a good balance of the two goals (optimizing tax and paying down mortgage).

You'd end up with $12K in the RRSP, and still have $15K cash + ~$5K tax refund coming = $20K to put to the mortgage.
Thanks for posting. When I was looking at the $27k that was to get down one tax bracket further. I suppose this would be a compromise.
BenK wrote: depends on what you're doing with your RRSP. I've been tracking a basic couch potato portfolio (20% XIC, 40% XWD, 40% XBB). In the last 12 months, its up about 10% and up 52% in the last 5 years (and that's not even including DRIP). so the choice would've been easy. but obviously, none of this is guaranteed.
I'd likely be doing TD e-series couch potato. The problem is, the market is at record highs right now and has been bull for many years...

That's a good return you had recently!
Deal Addict
Aug 21, 2007
4878 posts
457 upvotes
gave up on rfd for g…
RRSP and take entire return and put on mortgage. most people have a VERY hard time doing the latter.
Left rfd
Jr. Member
Oct 1, 2008
148 posts
70 upvotes
Lend yourself your RRSP and pay the Canadian benchmark rate as your RRSP investment return. I beleive this was mentioned a few Moneysense magazine issues ago. You will need a trustee to setup, and there is likely some more fees involved but you will be paying yourself instead of the bank for the mortgage without withdrawing your RRSP as income. Haven't tried this myself, but definitely interested if someone could chime in that has done this.
Deal Fanatic
User avatar
Jan 27, 2007
5087 posts
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Peterborough
forexnut wrote: Lend yourself your RRSP and pay the Canadian benchmark rate as your RRSP investment return. I beleive this was mentioned a few Moneysense magazine issues ago. You will need a trustee to setup, and there is likely some more fees involved but you will be paying yourself instead of the bank for the mortgage without withdrawing your RRSP as income. Haven't tried this myself, but definitely interested if someone could chime in that has done this.
Generally a strategy for very hig income earners. OP does well, but costs of trustee etc. to do this outweigh the benefit.

Would have to do a detailed analysis to look at payback.
[OP]
Deal Addict
Mar 21, 2013
4426 posts
6941 upvotes
Canada
Mike15 wrote: While I understand wanting to be 'mortgage free,' you also don't want to be penny-wise, pound-foolish.

http://www.taxtips.ca/taxrates/ab.htm

With AB marginal rates, I'd consider putting ~$12K in RRSP contributions. You'd get 42% (~$840) back on the first ~$2K, and 41% (~$4,100) back on the next ~$10K. Once you hit the 38% bracket (26% Fed + 12% AB) at $140K taxable income, stop, and put the rest against your mortgage. Should be a good balance of the two goals (optimizing tax and paying down mortgage).

You'd end up with $12K in the RRSP, and still have $15K cash + ~$5K tax refund coming = $20K to put to the mortgage.
Thanks, I contributed $12,000 like you suggested. Now, whether to put them in index funds right now or wait for a bit! I always invest at the peak it seems.
Deal Fanatic
Nov 24, 2013
6241 posts
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Kingston, ON
Blubbs wrote: Thanks, I contributed $12,000 like you suggested. Now, whether to put them in index funds right now or wait for a bit! I always invest at the peak it seems.
Nice!

Part of the index investing / CCP philosophy is don't try to time the market, just keep investing, and it'll smooth out over time. I know what you mean about equity markets being at all time highs, but conversely, you always want equities to be hitting new highs. That's why we invest (as opposed to 'trade'), right?

If you want to be conservative, I'd just use a higher bond allocation. Bond funds are not quite at all-time highs right now (November correction on hawkish US Fed).
[OP]
Deal Addict
Mar 21, 2013
4426 posts
6941 upvotes
Canada
Mike15 wrote: Nice!

Part of the index investing / CCP philosophy is don't try to time the market, just keep investing, and it'll smooth out over time. I know what you mean about equity markets being at all time highs, but conversely, you always want equities to be hitting new highs. That's why we invest (as opposed to 'trade'), right?

If you want to be conservative, I'd just use a higher bond allocation. Bond funds are not quite at all-time highs right now (November correction on hawkish US Fed).
Yeah, plus since it's RRSP I probably won't be accessing it for 35 years.

Since I am 29 and paying down my mortgage so aggressively (over $60k principal / year), I thought that might form a bigger part of my low risk 'investment' and I could focus more on pure equities for retirement. Like 10% or 0% bond allocation. Thoughts?
Deal Fanatic
Nov 24, 2013
6241 posts
2987 upvotes
Kingston, ON
Blubbs wrote: Yeah, plus since it's RRSP I probably won't be accessing it for 35 years.

Since I am 29 and paying down my mortgage so aggressively (over $60k principal / year), I thought that might form a bigger part of my low risk 'investment' and I could focus more on pure equities for retirement. Like 10% or 0% bond allocation. Thoughts?
I'm 31 and 10% bonds, so you're preaching to the choir.

I max CPP contributions, and my wife has a DB government pension in her future, so I prefer to consider those as my 'fixed income' portfolio. The upside on equities is too big to ignore for my actual investing.
Deal Addict
May 17, 2012
2805 posts
1658 upvotes
ontario
at your ages gentlemen, i wouldn't even bother with bonds/fixed income if the plan is to keep investing for another 35+ years. i'm a decade older and at 0% (although I'm thinking of moving to 5-10%)
Deal Expert
Feb 29, 2008
28886 posts
4607 upvotes
Montreal
RRSP.

If the bank is lending you money at 2.5℅ on your house, why are you in a rush to pay it down?
[OP]
Deal Addict
Mar 21, 2013
4426 posts
6941 upvotes
Canada
Ok, I doubled down to get me down to the next tax bracket and also got a $15k Tangerine RSP Loan. 1.5%, invested in their Equity Growth Portfolio for a year (1.07% mer), then I can switch it to TD e-series or Vanguard. Will create about a $5700 refund. I could pay it off immediately but the cost of borrowing is $137... lol.
Deal Addict
Apr 21, 2014
2293 posts
1051 upvotes
Alberta
WOW the Tangerine RSP loan is only 1.5%? Is that common? Most places i have seen are at prime + 0.5% or so.
[OP]
Deal Addict
Mar 21, 2013
4426 posts
6941 upvotes
Canada
I know, it's crazy. You have to invest it with them but it's impressive.
Deal Addict
Apr 21, 2014
2293 posts
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Alberta
Blubbs wrote: I know, it's crazy. You have to invest it with them but it's impressive.
True, but their funds aren't that bad and not super high MER's. I think they are in the 1.xx%. I did give them a call, it has to be paid back in 9 months.

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