Should You Contribute to Your RRSP Or Pay Down the Mortgage?

Should you pay into your mortgage or build your Registered Retirement Savings Plan (RRSP)? It depends on your financial situation, your income and marginal tax rate, and the debt you are carrying plus your dreams for the future. Most of the time, it’s best to find a balance between these two goals. Here are a few pointers to guide your decision.

What can you manage right now?
If the mortgage on your home is all you can afford to carry now, then make this your focus. Owning your own home is a lifestyle choice, and having a mortgage is the usual price.

Keep in mind that you are building home equity through paying off your purchase rather than renting. That, in itself, is building your wealth.

Grow your RRSP and shrink your mortgage at the same time.
For many people, investing in their RRSP results in a tax refund. You can use yours to pay down your mortgage. You will lose the benefit of compounding the interest from your RRSP investment, but you’ll see that mortgage burning party happen much faster.

RRSPs, income, and taxes.
With an RRSP, the government provides a tax deduction today to encourage you to save for retirement. You defer the tax you owe on your investments until you take that money out to live on as a retiree.

If you’re in a high marginal tax bracket, that deduction can save you a lot of taxes. If your income is modest, you can reserve your available RRSP contribution room until your career soars and your salary as well. Because your tax bracket will rise accordingly, and those deductions will be very welcome.

What kind of retirement do you envision?
If you delay your retirement savings until your mortgage is paid off, it means losing all those years of great RRSP growth. The investment interest will compound within your tax-sheltered portfolio.

In the long run, you’ll create a substantial retirement fund. It’ll go great with that home you also own.

Aim for a good balance of savings to debt reduction, in a sensible approach that will achieve both these goals. Your Financial Advisor can help you calculate different scenarios, comparing RRSP investment performance to the cost of your mortgage.