Should I make an RRSP contribution or pay down my mortgage or debt?

This is a frequent question asked when I am discussing planning options with clients.  Especially during February as people are gearing up for tax preparation time.

There isn’t a hard and fast answer to that.  It depends on what kind of debt you have, and what tax bracket you are in.  It also depends on your tolerance for debt.

Here are a few tips that can help you make the right decision for your situation.

  • If your income is below $40,000 per year, pay off all non-tax deductible, high interest rate debt first.   Credit card annual interest rates are around 20% or more!  Combined Federal and Provincial tax rates in Ontario on income below $40,000 is 20.05%, so the tax and interest savings are similar between RRSP contributions and paying off this debt.
  • Review the interest rate you are paying on your mortgage.  If the interest rate on your mortgage is lower than what you expect to earn in your RRSP, then it is a better strategy to make the RRSP contribution.  Again, your tax bracket should factor into this decision.
  • If you are really uncomfortable with debt, and don’t sleep at night because you worry about it, then paying off your mortgage should be seriously considered.  Once the mortgage gets down to a level where you are more comfortable, then you can shift over to RRSPs.   This is especially important if you are in a high ratio mortgage with little equity.
  • Since mortgage rates are low right now, consider making an RRSP contribution to generate a tax refund, and then using the tax refund to pay down your debt or mortgage.  This might provide the maximum financial benefit over the long term.

The term and interest rates on your mortgage or debt, the expected return on your RRSP, and your tax bracket are all very important factors when making this decision.  Each person’s situation is different.  In order to see how all of the variables interact for you, it is useful to speak to a qualified financial planner.  We can help you determine the best way to generate maximum benefit from your dollars in a way that suits your personal situation.

This article was prepared by Terry Lynn Adamson, CFP®, FMA who is an Investment Advisor with HollisWealth (A Division of Scotia Capital Inc.). This is not an official publication of with HOLLISWEALTH. The views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessarily those of, with HOLLISWEALTH.

Comments are closed.