Investment Options

Registered Retirement Saving Plan, Tax Free Savings Account or Mortgages! Which one?

With the introduction of Tax Free Savings Accounts (TFSA) in 2009, a new player has made the time-honoured battle of Registered Retirement Saving Plans (RRSP) versus mortgages a little bit more complicated. While everyone’s circumstance is unique, these 10 tips will help you make more informed decisions.

  1. Pay down your debt while you invest.
  2. In case of emergency, invest in a Tax Free Savings Account.
  3. Ready for retirement.
  4. Shelter or haven?
  5. Go to the source.
  6. Rising rates.
  7. Creating an extra cushion.
  8. Go for the goal.
  9. Self Employed and creating stability.
  10. A matter of age.

1.Pay down your debt while you invest. Ask any financial advisor where to put your money and most will suggest that paying down debt—including a mortgage—should be your first order of business. However, if the interest rate of your mortgage is lower than the rate of return on your Registered Retirement Saving Plan investment, you might want to contribute to an Registered Retirement Saving Plan and then redirect the refund into your mortgage. This way you’re investing and paying down your debt. However, if you have credit card or other high-interest consumer loan debt, work to eliminate it as quickly as possible—even before your mortgage.

2.In case of emergency, invest in a Tax Free Savings Account. In many cases, a Tax Free Savings Account is regarded as an excellent emergency fund. Funds can be withdrawn at any time without penalty and any amount you withdraw can be put back into the tax-free account without reducing your contribution limit. You might be chipping away at that mortgage, but if you need a new roof, you can tap into your Tax Free Savings Account and re-contribute the funds in the future. The other options? Take out a loan, cash in other investments (and pay a penalty) or incur credit card debt.

3.Ready for retirement. If you’re edging close to retirement and already have a healthy Registered Retirement Saving Plan portfolio, you may want to consider maximizing your Tax Free Savings Account contributions. Interest and investment income earned in a Tax Free Savings Account are not taxed on withdrawal and there are no restrictions on how the money is spent.

4.Shelter or haven? Registered Retirement Saving Plans are tax shelters—taxes are deferred until you draw on funds. Contributing to RRSPs may help decrease your tax bill when you’re younger; the opposite is true when you’re older, especially since your Old Age Security Pension is taxed back once your income hits $66,733 (2010). With Tax Free Savings Accounts, your after-tax funds make up your contributions so you can draw down on these funds tax-free at any time.

5.Go to the source. If you’re getting a large tax return at the end of the year, consider filing a T1213 form with the Canada Revenue Agency to request a reduction in the amount withheld from your paycheques each month. You’ll have more monthly cash on hand that will enable you to make more aggressive mortgage payments or invest in a Tax Free Savings Account instead.

6.Rising rates. Interest rates may be low now, but if they increase even a few percentage points and you have a variable mortgage, will you still be able to afford the payments? If you focus on paying down your debt, you’ll be in a better position to negotiate when you need to renew your mortgage in the future.

7.Creating an extra cushion. If you’ve already maxed out your Registered Retirement Saving Plan  but don’t have a company pension to fall back on, consider investing in a Tax Free Savings Account to give you some added comfort at retirement time.

8.Go for the goal. If your goal is to save money for retirement, Registered Retirement Saving Plans are still considered the tried-and-true long-term investment option. On the other hand, if you’re trying to save money for a mortgage down payment or to renovate your home, a Tax Free Savings Account is a solid short-term investment since you enjoy the benefit of a tax-free investment that can be accessible without penalty.

9.Self Employed and creating stability. If you’re self-employed or working seasonally, locking money into an Registered Retirement Saving Plan  can be daunting, especially if you think there’s a good chance you might need to access your funds before retirement. You’ll need to pay a penalty for cashing in Registered Retirement Saving Plan , but if you need to take out the money because you’re not working, you’ll at least be taxed at a lower rate. The other option: contribute to a Tax Free Savings Account. When your income situation stabilizes, you can use your Tax Free Savings Account to fund an Registered Retirement Saving Plan contribution.

10.A matter of age. You can only contribute to your Registered Retirement Saving Plan   until the end of the year in which you turn 71, but you can continue invest up to $5,000 per year in a Tax Free Savings Account as long as you’re a resident of Canada. At the other end of the spectrum, if you’ve started working and you’re under 18, you can’t contribute to a TAX FREE SAVINGS ACCOUNT. You can, however, you may want to start contributing to an Registered Retirement Saving Plan and start creating contribution room for the future.

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