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My advice • February 11, 2020
modified on February 26, 2020

Investment Series - Taking advantage of your RRSP

Which option is best: contributing to your RRSP, paying off your mortgage or contributing to your spouse’s RRSP?

Pierre-Raphaël Comeau
Expert Advisor, Wealth Management
and LBC Financial Services

Do have questions about your retirement savings? Our expert has the answers.

Invest in an RRSP or pay off your mortgage?

Do you have an amount you want to invest and can’t decide whether to contribute to your RRSP or pay off part of your mortgage? Get out your calculation tables to make an informed decision. The first step is comparing the tax savings from an RRSP contribution to the interest savings from your mortgage payment. As a general rule, when mortgage interest rates are high, paying off your mortgage is better. When interest rates are relatively low, as they are now, the balance shifts in favour of investing in your RRSP.

For example:
Let’s say your mortgage balance is $120,000 with a 3% interest rate. If your annual income is between $60,000 and $87,000, the tax rate you pay on every last dollar you earn is 37.12% (based on the 2019 tax table). Also, let’s say you have $10,000 and you’re wondering whether you should pay off part of your mortgage or contribute to your RRSP. By paying back $10,000 on your mortgage at 3%, you save $300 in interest the first year ($10,000 x 3%). By contributing the same $10,000 to your RRSP, you’re saving $3,712 in taxes ($10,000 x 37.12%). As you can see, in this situation, contributing to your RRSP is more beneficial for you, not to mention the return on investment you get on $10,000.

The immediate tax savings on the RRSP contribution are greater than the interest savings on the mortgage. Expected return on investment should also be considered. Let’s compare mutual fund performance and real estate market appreciation. Historically, mutual funds have outpaced house price indexes, which favours RRSP contribution over mortgage repayment. However, nothing is preventing you from using a hybrid strategy; contributing to your RRSP can generate a tax return you can then use to pay off part of your mortgage!

Your RRSP vs. your spouse’s RRSP: The benefits of each

Saving for retirement is always a good option, whether it’s for you or your spouse, but your financial and family situation will influence your choice. First consideration: Are you a married or common-law couple? For married couples, contributing to your spouse’s RRSP can be a good strategy for a person who currently earns the highest income and contributes to the person with who will have a lower income during retirement. It can lower their marginal tax rate and therefore their payable taxes.

For example:
Let’s say that in a couple, spouse A earns $60,000 and spouse B earns $105,000 a year. The marginal tax rate for $60,000 is 37.12%, and 45.71% for $105,000 (based on the 2019 tax table). Let’s say the couple wants to contribute $10,000 to spouse A’s RRSP. If spouse A makes the contribution, the tax savings are $3,712 ($10,000 x 37.12%), whereas if spouse B makes the contribution, the tax savings are $4,571 ($10,000 x 45.71%). For the same contribution, the couple earns $859 in tax savings ($4,571 - $3,712).

All RRSPs are part of the family’s wealth and will be split 50-50 in the event of a divorce. For common-law spouses, contributing to a spouse’s RRSP represents a donation that cannot be recouped in the event of a divorce. No take backs in this case, so think carefully before making this decision.

Your advisor will be able to help you take all these factors into consideration and make recommendations specific to your own situation. Feel free to ask them about it.

A financial health assessment is the first step to better manage your personal finances. It helps paint a clear picture of your financial situation, define and prioritize your objectives, and suggest what you should do. Take your first step now and meet with your advisor.

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