RRSP vs Mortgage
That time of the year is soon approaching and until March 1st, RRSP season will be upon us, and the option of taking advantage of this (if possible). Maybe you made some extra money or you received a bonus this year, what are your best options with this extra cash?
Mortgage Payment Option
If you have a larger mortgage and/or a higher interest rate mortgage, then it may pay off better for you to put the money towards an extra payment. If the interest on your actual mortgage payment is higher than the possible return that you would be receiving on the investment, then in this case, it may pay off to put it towards the mortgage.
One consideration is how close you are to your retirement. Ideally when you retire, you want to have as little debt as possible. Chances are when you are retired, you will be on a fixed income, possibly less than your standard income from working. In this case, putting that extra cash into paying off that debt will help you to achieving a Debt Free retirement.
Low(er) Income Tax Bracket
If you are in a lower income tax bracket, you may not get as much benefit putting that extra cash into your RRSP over your mortgage. Reason being, there may be less contribution available than someone in a much higher tax bracket with regards to lowering the overall income to receive improved tax breaks. Also, in a lower tax bracket, the individual will not see as much of a benefit in their taxes with lowering their overall income.
The RRSP Option
You should get in the habit of saving for your future, and an RRSP is one of the available options. If the interest rate is higher on your RRSP over your mortgage, then going the RRSP option may be the better choice.
It is a good idea to contribute often and start at an early age if possible. This way you can help to take advantage of compounding interest. The compromise here is that you will be putting less money into your mortgage, and thus it will take longer to pay down your mortgage fully.
The Best of Both Worlds
If you regularly invest into your RRSP each year, this can give you the option to put that extra cash towards your mortgage. This way you are still getting the compound interest from your RRSP and you are getting another payment on your mortgage.
Also, another option for consideration is to go the RRSP route, and with the money from your tax return put that back into your mortgage. Just try to fight the urge to spurge your tax return on a trip or some other want item. Try to save or pay down your debts!
