| Contributing to an RRSP, paying down a mortgage | | | | Frequent early withdrawals from an RRSP |
| and investing in a TFSA are all very important | | | | account will involve taxes and, in most cases, |
| pieces of a complex investment strategy. As an | | | | fees. Investments removed from an RRSP prior |
| investment advisor, I would help you to navigate | | | | to retirement cannot be re-contributed in a later |
| the pros and cons of all three, bearing in mind | | | | year. The exception would be for Government |
| your unique circumstances. The discussion below | | | | approved plans such as the home buyers or life |
| addresses some of the key considerations as you | | | | long learning programs. |
| try to decide on the best investment strategy | | | | When an RRSP is used correctly it can provide a |
| for you. | | | | great forum to: |
| Paying down a mortgage: | | | | * Shelter investment growth, such as dividends, |
| If your goal is to pay down your mortgage | | | | interest income and capital gains, from being |
| quickly, there is a simple method that can be used | | | | taxed |
| to "tip" the math in favour of the borrower, | | | | * Make contributions tax deductible on personal |
| instead of the bank. I call it "mortgage tipping". | | | | income tax |
| Most financial institutions that offer mortgages will | | | | * Provide a pool of capital to be used as income |
| provide an amortization schedule, upon request. | | | | during retirement |
| This is simply a breakdown of monthly payments | | | | Investing in a TFSA account: |
| that identifies interest and principal portions, | | | | The Tax Free Savings Account (TFSA) is a new |
| separately, for all payments. It also demonstrates | | | | type of account that has more flexibility than an |
| how this balance changes with each mortgage | | | | RRSP because frequent or early withdrawals are |
| payment. When you first review the amortization | | | | not penalized. There are also tax benefits to the |
| schedule, you might be surprised by how | | | | TFSA, with some similarities to the RRSP, in the |
| disproportionate the balance is between interest | | | | sense that investment growth is tax free. In |
| and principal mortgage payments, especially on a | | | | contrast to the RRSP, this account can be used |
| newer mortgage. | | | | as a general savings account, which can be |
| Houses are normally considered to be illiquid | | | | tailored to meet any of your financial goals rather |
| assets because they aren't usually the asset | | | | than simply be restricted to retirement. |
| earmarked to eventually provide retirement | | | | RRSP, Mortgage and TFSA - finding the best |
| income or emergency cash, since that would | | | | investment strategy for you: |
| require selling or getting a second mortgage. This | | | | RRSP, residential property and TFSA are all |
| means that you will want to balance your | | | | assets that should grow over time, at different |
| mortgage payments with other considerations, | | | | stages and in different increments. |
| including short term needs for liquid assets for | | | | Ideally, it's wise to have both an RRSP account as |
| cash and long term needs for a retirement plan. | | | | well as a TFSA account and to contribute to both |
| The "mortgage tipping" strategy will help you to | | | | while paying down mortgage debt, at the same |
| identify the mortgage payment plan that | | | | time. Keep in mind that an RRSP and a TFSA are |
| accelerates your mortgage payments at a rate | | | | simply accounts and that money can be deposited |
| that minimizes overall interest payments but still | | | | into either within the limits outlined by the Federal |
| leaves an appropriate amount of funds available | | | | Government, just like a chequing or saving |
| for contributions to RRSP accounts and /or | | | | account. The difference is what happens to the |
| investing in a TFSA, depending on your | | | | money while it's in the RRSP and TFSA. Both can |
| investment goals. | | | | be deemed investment accounts. That means the |
| Contributing to an RRSP: | | | | money can be invested in suitable investment |
| The Retirement Savings Account (RRSP) allows | | | | products so that it has a chance to grow |
| for long term savings with tax advantages. Like | | | | depending on how your financial needs and goals |
| its name, "retirement account", it is meant to be a | | | | balance out over the long and short term. |
| savings tool to provide an income for retirement. | | | | Allotting monthly savings to all three assets can |
| It's not meant to serve short term financial | | | | be one of the best ways to increase personal |
| needs. | | | | wealth, over time. |