Cash-Flow Management involves much more than conventional budgeting for planned (an unplanned) expenses; rather it promotes the discovery and exploitation of available financial efficiencies…

Mortgage vs. RRSP

A common cash-flow management question considers whether accelerating one’s mortgage repayment is more advantageous than contributing to one’s own (or spousal) RRSP? The long and short of it is well, it depends; in fact on a number of variables:

• Your Marginal Tax Rate today and that (expected) in retirement?
• Your RRSP’s expected Return on Investment and for how long?
  
• The Cost of Capital; reflecting your mortgage rate and amortization?
  
• Whether your mortgage is considered high ratio; requiring additional CMHC mortgage insurance?
  
• Will mortgage interest be considered tax deductible?
  
• Are there any limitations and/or penalties (differential) on pre-payments?
  
• Economic, market, interest rate, investment specific and other risks/trends…
  
• Health, lifestyle, retirement, and legacy goals?
  
• Your risk tolerance, income and liquidity needs?

While the purpose of contributing to your RRSP is to set aside and grow wealth over time in support of your retirement lifestyle (and perhaps other goals too,) for many taxpayers, contributions may also manifest in significant and immediate tax savings – RRSP contributions are in fact a deduction from income, thus contributions earn tax savings equivalent to one’s Marginal Tax Rate:

Also beneficial is that tax on investment returns earned within an RRSP is deferred until moneys are ultimately withdrawn; perhaps then at a reduced marginal tax rate... Spousal contributions too may be considered to promote income-splitting – by transferring future tax obligations to a lower income spouse, additional tax savings may be achieved.

Moreover, RRSPs are generally considered to be more readily accessible than fixed real estate assets – moneys may be withdrawn (deregistered) or accessed via the Home Buyers Plan and/or Life Long Learning Plan. RRSPs also provide an opportunity to diversify savings across multiple asset classes; including fixed (guaranteed) and variable return investment opportunities (including real estate) – even your own mortgage may be considered an eligible investment within your registered plan. Beyond the virtue of not putting “all of your eggs in a single basket,” RRSPs may afford protection from creditors and also offer the ability to annuitize retirement savings for a guaranteed, pension-like income for life.

Conclusions – Notwithstanding these and other variables, if your RRSP can achieve an average return equal to or greater than your mortgage’s carrying cost (net interest expense,) you are generally better off to contribute to your RRSP; and then perhaps apply any related tax savings to your mortgage pre-payment. Moreover, net tax savings; representative of the difference between immediate tax savings and (reduced) tax obligations upon withdrawal, in addition to on-going tax deferrals and perhaps access to additional tax credits, further highlight the potential advantage of RRSP contributions versus accelerated mortgage pre-payments.

While eliminating one’s mortgage and other indebtedness is always beneficial from a financial planning standpoint, know that it is not in fact uncommon for homeowners to enter retirement with (some) debt. One’s lifestyle expense and the (high) cost of home ownership (especially here in the lower mainland,) shall ultimately have bearing over one’s financial/debt re-payment strategy. Other goals and needs too should be considered; for instance an empty-nester’s desire to downsize, travel goals, (future) healthcare expenses, legacy planning and more...

Real estate has been touted as one of the most effective ways of building wealth over time; after-all, they don’t make it anymore! Like anything worthwhile however, it is more often time-in and not usually timing that builds real wealth from (variable return) equity ownership. When considering that for many, one’s home represents their single largest asset (by far,) perhaps it makes financial sense to diversify savings and investment strategies to include other complimentary asset classes including fixed (guaranteed) and variable return investments, insurance-backed solutions and more...

I would be pleased to help you consider your mortgage and other debt re-payment strategies as well as your registered plan options – please take a moment to consider your calendar and contact us to arrange for your no-obligation personal financial assessment.   

*This article is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication.

Dale Swan, CSWP, CFP, FMA, FCSI

ScotiaMcLeod Wealth Advisor

Life Underwriter

ScotiaMcLeod Financial Services

Direct: 604-661-7455

Toll-free: 1-800-263-8637

Fax: 604-661-7494

dale@swanprinciple.ca

dale_swan@scotiamcleod.com

ScotiaMcLeod
650 West Georgia Street

Suite 1100, PO Box 11615
Vancouver, BC V6B 4N9