Each Wednesday, the Amazing Accountant who does my personal and business taxes, Mindy Abramowitz, highlights an accounting topic many Canadians encounter. Today she dives into the frequent question: to pay down my mortgage or contribute to my RRSP?
This is hotly debated question in Canadian personal finance circles and the answer will differ according to the asker’s situation and temperament.
From a tax reduction perspective, the mortgage payment will yield no immediate benefit, whereas an RRSP contribution will minimize taxes payable in the year it is made. Over the long term, the decision to pay down the mortgage will save you interest but will deprive you of tax-free compound growth in your RRSP.
However, if the following conditions apply to you, the mortgage payment route will likely be the more helpful option:
- your annual income falls into one of the lower tax brackets; or
- the interest rate on your mortgage is higher than the return on the investments in your RRSP; or
- your retirement will come sooner than your last mortgage payment; or
- you simply cannot tolerate carrying debt.
Assuming you are in a high tax bracket, bumping up your RRSP contributions will give you the most bang for your buck. In some cases, you’ll get to have your cake and eat it too: you can use the resulting tax refund to pay down your mortgage.
Crunch the numbers to figure out what would work best for you — easy-to-use RRSP vs. mortgage calculators abound on the internet (try the one at taxtips.ca) — or talk to your financial advisor.