RRSP Tip

13 Responses to “RRSP Tip”

1. A commong guy 15. Feb, 2012 at 4:16 pm #

   Not that I promote to put into RRSP instead of mortgage but his calculation does not take into account the fact that you get a tax break NOW when you put into your RRSP. So if your net tax rate (at the end) is say 35% then you are essentially getting a 35% bonus on your payment too.
2. Itchy 15. Feb, 2012 at 5:46 pm #

   I don’t think there is a cut and dried correct answer to this issue. I mean it depends on your situation right. What is your age? Do you have a work pension? How much do you owe on your mortgage etc., etc. Remember though that RRSP’s are not a tax avoidance vehicle, but a tax mitigation one. You will pay tax on it when you take it out. The idea is you’ll pay at a lower tax rate because you’ll be making less income when you’re retired. Maybe instead of giving government 35% now you give them 27% later….really a savings of 8%, still not bad.
   I think the more interesting conversation is RRSP vs. TFSA.
3. Terry 15. Feb, 2012 at 9:22 pm #

   With interest rates at their lowest levels *ever*, why would you try and pay your mortgage off faster than necessary? Surely there are relatively safe investments that would have a higher return than the 2.99% mortgages that were being offered a few weeks ago. I mean, getting a 5% return on your money isn’t exactly rocket science…
4. taraz 15. Feb, 2012 at 10:28 pm #

   Why pay your mortgage off faster? Because interest rates aren’t going down. And when the interest rates go up, it will hit your bond values and any stocks where the company has debt. Also, GIC rates are nowhere near 2.99 percent right now. While 5 percent may be realistic for index funds in the long term, you had better hereto some cash on hand for short term market fluctuations.

   One other thing to take into account is that investments outside RRSP are often taxed at capital gains or dividend rates, whereas RRSP stock increases are taxed as income. How that affects you depends on your situation.

   The best plan is probably to rent cheap and pay cash for a reasonable house in a few years (once the market finishes correcting and when the higher interest rates start to give cash buyers an edge).
5. AndrewB 16. Feb, 2012 at 8:15 am #

   While the idea of paying down your mortgage can work for some limited group of people, but the 3 reasons listed are just plain silly.

   Every family is different, open up an Excel and calculate! That is not a rocket science!
6. Steven 16. Feb, 2012 at 9:26 am #

   Wow. The fact that he didn’t take into account the tax deduction on RRSP is very strange. Really it’s the most important part of the RRSP.

   I don’t disagree that for most people guaranteed rate and having paid off their house makes them feel good. Anytime you’re in humongous leveraged debt that you could go underwater on it’s a good idea to keep yourself afloat.
7. Jill 16. Feb, 2012 at 11:04 am #

   If there is an equal employer contribution, RRSP is good. Else its a sham, pay the mortagage or other debts first.
8. Brendan 16. Feb, 2012 at 11:30 am #

   RRSP isn’t necessarily a sham if your currently in the highest tax bracket.
   • Jill 16. Feb, 2012 at 12:06 pm #

     Its like people having lots of cash sitting in savings account when they have credit card debt.

     Anyway , I said its a SHAM when you are the only one contributing and when you have debt servicing to do. Also you can’t predict the future tax rates.
9. WaitLonger 17. Feb, 2012 at 8:15 am #

   RRSP is just a tax deferral plan.

   You have no idea what the marginal tax rate will be when you are ready to withdraw the funds. So while it’s good to get into the habit of saving using an RRSP, max out your TFSA first, then your spouse’s TFSA, then your kids RRSP plans. Then work on RRSPs after that.

   I would agree that a combination of paying down mortgage combined with saving is best. It shouldn’t be either or. I mean it’s nice not to have a mortgage, but you will need residual income coming in when you can no longer work or retire. CPP and old age pension will not be enough.

   If you have huge credit debt, pay that first.
10. wsn 17. Feb, 2012 at 10:41 am #

    I see the point of paying down a 5+% mortgage. But what’s the point of paying down a 2~3% mortgage?

    Even in a turbulent economic era, overall, it still makes sense to invest the money into the stock market via RRSP/TFSA. You may lose money, but you may make a lot of money too. If you don’t desperately need the cash, give it a bit patience and you will come out on top.
    • wsn 17. Feb, 2012 at 10:44 am #

      Just to add, for those predicting a higher mortgage interest rate, have you ever considered:
      1) Why is the rate so low now?
      2) What is the reason for a future hike?

      To me, it’s pretty obvious that the rate is low now because the US economy is slow. The rate will go up, AFTER the US economy heats up too much to cause major inflation. Between the two events, stocks have a lot of room to go up.
11. GM 17. Feb, 2012 at 5:19 pm #

    With an RRSP you will save 30 – 40% off your taxes by the amount you contribute. This money will then be able to grow TAX FREE for all the years up until you are 71.

    Pay off your mortgage and you will save 3 or 4% depending on your interest rate. Whoopee. Then if you use this money to invest, you’ll pay capital gains tax on it whenever you sell the stock or pay tax whenever you receive interest or dividends.

    So let’s see… 35% immediate return plus tax free growth, or 4% return and taxable growth. Hmmm…