DAILY FINANCIAL TIPS – DAY 43 – PAYING DOWN MORTGAGE DEBT OR RRSP CONTRIBUTIONS?
People who have disposable cash are often conflicted whether to pay down their mortgage debt or make RRSP contributions at this time of year. This is a nice dilemma to have. It also doesn’t have to be an “either – or” decision. Either choice makes financial sense, but a combination strategy may maximize the effect. If you have disposable cash either from the sale of assets, gifts, annual performance bonuses, commissions, etc, take your time to make a decision that is most appropriate for your personal situation and longer-term goals.
The simplest and most obvious choice is whether to allocate all the monies to paying down your mortgage or making an RRSP contribution. If your mortgage debt is tax deductible (ie mortgages on investment properties or for investment purposes), then money would be better allocated to RRSP contributions.
Paying down mortgage debt for younger families will have significant longer-term savings. Older families may wish to pay down mortgage debt if a priority is to retire debt free. If you work for an employer with Defined Benefit Pension plans or generous Defined Contribution Pension plans, paying down mortgage debt may have longer term financial benefits. Conversely, if you do not have significant pension retirement benefits, RRSP contributions should form part of your financial planning. Every family situation is different so factor in your individual situation when making decisions.
Before allocating all monies to paying down mortgage debt, investigate if an RRSP contribution will reduce your taxable income bracket. If making an RRSP contribution will reduce your tax bracket, these contributions can have a significant saving on your income taxes.
Remember, RRSP contributions will reduce your income tax payable. A combined strategy can be a win/win strategy. By contributing to an RRSP, you’ll magnify your tax refund. Then take the tax refund amount and pay down your mortgage by this amount. This strategy has the effect of both building your Retirement Savings and paying down your long-term mortgage debt.
You work hard for your money, take the time to investigate the best options to allocate cash savings, gifts, or cash windfalls such as performance bonuses, commissions, etc. A Financial Planner/advisor can help calculate strategies that have the best long-term results for your family situation and goals. There are also online tools that can calculate the net savings of mortgage pre-payments and RRSP contributions.
These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.