Pay Down the Mortgage or Increase the RRSP by gabyion

VIEWS: 5 PAGES: 2

									Pay Down the Mortgage or Increase the RRSP
Many factors will affect this decision. They include           $7,895 for the same $10,000 contribution because
your age, current taxable income, level of your                they are only subject to a 21.05% marginal tax rate.
debt, interest rate on your mortgage, tolerance for
risk and projected taxable income when you retire.                    CURRENT DEBT LEVELS
                                                               Individuals who have very high levels of debt
     AGE                                                       subject to high interest rates will likely choose to
Most individuals want to have their mortgages paid             pay down this debt before contributing to an RRSP.
off before they retire. Retiring free of all debt allows       For example, credit card debt can incur interest
a person to have less worries and more control                 charges of over 20%.
over their finances.     Many couples are getting
married and having children much later than their                INTEREST RATE ON YOUR
parents did. Thus, it is now common for a couple to            MORTGAGE
have a mortgage when they are in their sixties.
                                                               It is very common to lock into a 5 year fixed-rate
The decision of mortgage vs. RRSP gets more
                                                               mortgage.    Two or three years into your 5 year
difficult as you have fewer years until your desired
                                                               term, interest rates may drop significantly. If this
retirement age to contribute to your RRSP and/or
                                                               occurs you may be better off making a permitted
pay down your mortgage.
                                                               privilege payment on your mortgage and paying
                                                               less non-deductible high-rate interest than investing
     CURRENT TAXABLE INCOME                                    in your RRSP and earning interest at today’s lower
Individuals who are subject to the highest marginal            rates. Conversely you could be locked into a very
tax rate get the most tax savings when they                    low interest rate on your mortgage. You could then
contribute to an RRSP.         Residents of Ontario            choose to invest in your RRSP and earn interest at
paying tax at the highest marginal rate can save tax           today’s higher rates.
of 46.41% their contribution. This means a $10,000
contribution will require a net cash outlay of only
$5,359 because your taxes will be reduced by
$4,641.   Ontario individuals with taxable income
below $35,000 will require a net cash outlay of
                                                    www.pkfhill.com
INSIGHTS                                                                                                         2008


   PROJECTED TAXABLE                                           mortgage interest rate is 5%, you achieve a 5% tax
INCOME WHEN YOU RETIRE                                         free return when you pay down your mortgage.
                                                               When you make an RRSP contribution and earn
In the year after attaining age 71, most people
                                                               less than 5% you could be worse off than if you had
convert their RRSP into a registered retirement
                                                               paid down your mortgage. Therefore you should
income fund (RRIF). A RRIF requires you to take
                                                               be willing to invest your RRSP wisely and take
yearly minimum withdrawals (based on your age or
                                                               some risk in order to earn more than the rate you
the age of your spouse) and pay tax on these
                                                               are paying on your mortgage.               Conservative
withdrawals at your current marginal rate.          The
                                                               investments such as GICs and government bonds
person who contributes to an RRSP and reduces
                                                               usually won’t earn you more than what you are
taxes at a higher rate than what they pay when they
                                                               paying on your mortgage.
withdraw the income will enjoy significant tax
savings. The individual who is subject to the same
tax rate when they contribute and when they
                                                                      SUMMARY
withdraw will not realize the same tax savings.                Seek the advice of an independent professional to
                                                               help you make your decision. RRSPs are a great
     TOLERANCE FOR RISK                                        way to save for retirement, but it is important to
                                                               consider your options.
The person who is subject to the same tax rate
when they contribute to an RRSP and withdraw                   The chart below should help you with your decision
from an RRIF, and who has a mortgage with non-                 but it is important to seek professional advice and
deductible interest, should consider their tolerance           not just rely on this chart. There are many other
for risk before investing in an RRSP.            If your       factors that could affect your decision.


                          Age Allows “Regular”       Marginal Tax Rate       Marginal Tax Rate
     Low Tolerance         Payments to Retire          Lower During         Is the Same During         Indicate
       For Risk                Mortgage                 Retirement               Retirement           Preference

                                                                                                          RRSP

                                                                                                          RRSP

                                                                                                          RRSP

                                                                                                          RRSP

                                                                                                          RRSP

                                                                                                      Mortgage

                                                                                                      Mortgage

                                                                                                      Mortgage




                                                    www.pkfhill.com

								
To top