You should always consider the implications associated with any financial decision you make, and the decision to either make a RRSP contribution or a significant mortgage payment is no different. Many banks will push their customers to contribute to their RRSP, and this may not be in your best interest. Banks often will benefit from your contributions through your purchase of their mutual funds–so you can’t always trust that they’re trying to help you out.
To make a smart decision on where you should put your money, you have to consider a few factors.
What are the projected mortgage interest rates?
You likely want to pay off your mortgage as soon as you can if you think rates are going to go up. But if they’re staying about the same or potentially dropping you may feel like there’s no need to rush. The problem with this thinking is that often perfect predictions don’t exist on how rates will change. Experts have said for years that rates will increase, for example, but instead at times we have seen them decrease.
The best thing to do is keep a level head about it. You don’t want to put down only the minimum mortgage amount each month, allowing you to put as much as you can in your RRSP, just because interest rates are low and it seems like they will be for a while. Put down what you can manage while taking other factors into consideration, and do watch rate projections so you can adjust accordingly.
How will contributing to your RRSP affect your tax refund?
Whenever you contribute to your RRSP, you get a tax refund back. The size of this tax refund depends on the size of your marginal tax bracket–the higher that is, the more beneficial will it be for you to contribute to your RRSP. Here’s an example. If your marginal tax bracket is 40%, you keep 60 cents out of every one dollar you make. But when you contribute to your RRSP, you’ll get 40 cents back in the form of a refund. So, RRSP contributions do have that benefit.
It’s good to diversify
You need to eventually both pay off your mortgage and contribute to your retirement funds–unless you have a particularly great pension plan or you have some funds waiting for you in a relative’s will, you can’t get away from it. So, don’t put too much emphasis on one or the other. If you’re trying to get your mortgage out of the way before contributing significantly to your RRSP, you may end up waiting for a while to put down those retirement contributions.
Need help understanding if you should contribute to your RRSP or pay down your mortgage? Contact me about my Brampton mortage broker services.
