How to identify your best long-term alternative
Have you ever wondered whether it makes more sense to pay off your
mortgage or to contribute to a Registered Retirement Savings Plan?
Perhaps you’re expecting to receive some extra money from an inheritance
or an employment bonus, and you’re not sure which route to take.
The truth is, there is no easy answer. There are many variables that must
be taken into account. Concentrating on paying down a mortgage may be
the best route for one person, while focusing on an RRSP may benefit
another. Here are some factors to consider:
Your age. When you’re young, it is wise to make your RRSP a priority. The sooner you get money into a sheltered retirement plan, the longer it will grow on a tax-deferred basis. But don’t overlook the need to build home equity. It can give you a head start on the expenses of moving to a larger home as your family grows.
Your income. The more you earn, the higher the rate of tax you’ll pay. That means you must earn more in before-tax dollars to make mortgage payments. If you’re a high income earner you may want to quickly reduce this expensive debt.
Investment returns. Pay attention to the rate of investment returns you could reasonably expect to earn when you contribute to your RRSP. Astute investors could be further ahead by investing their money than paying down the mortgage. The benefits of investing are magnified by an RRSP, with tax-deferred growth within the plan and tax deductions on contributions.
Your mortgage rate. If your mortgage rate is higher than your expected investment return on your RRSP, then paying down your mortgage may be prudent – especially if you expect borrowing costs to rise in the future. But if your mortgage rate is low, it may make more sense to contribute to an RRSP.
Are you behind on your RRSP? If you have made less than your maximum annual RRSP contribution in the past, a lump sum could allow you to catch up. You are allowed to make up for unused contribution room that you’ve accumulated from past years – which can also generate a significant tax refund.
Your pension plan. Those with generous workplace pension plans that
provide for a secure retirement may be able to concentrate on a mortgage
without giving up financial security in retirement.
Of course, you can focus on both your RRSP and mortgage. For example, contribute to your RRSP and then apply the tax refund it generates towards a prepayment on your mortgage.
Talk to your Investors Group Consultant to determine what’s right for you.
Justin Rabe, Consultant
(204) 729-2000 ext. 253
Written and published by Investors Group as a general source of information only. It is not intended as a solicitation to buy or sell specificinvestments, nor is it intended to provide tax, legal or investment advice. Readers should seek advice on their specific circumstances froman Investors Group Consultant. Commissions, fees and expenses may be associated with mutual fund investments. Read the prospectusbefore investing. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated.™Trademark owned by IGM Financial Inc. and licensed to its subsidiary corporations.“Crossroads: Pay down your mortgage orcontribute to your RRSP?” ©2012 Investors Group Inc. (11/2012) MP1030