Topic  # 20  RRSP (5)  Paying Down your Mortgage or Make an RRSP Contribution  

Date:  February 16, 2012

Good morning. When it comes to financial planning there is a continuous debate.  Do I pay down my mortgage or contribute to an RRSP?

There really isn’t a correct answer here.   It all depends on your financial situation and your comfort level.  If you are in a high marginal tax bracket, you probably should make the RRSP contribution.  If you are extremely uncomfortable with debt, then you probably should pay down your mortgage. Each person’s situtation is unique.

Basically,  you have three options.

The first is to  Pay down your mortgage. 

This saves you on interest and makes you debt free sooner. The big problem is that you have no savings for retirement, you lose out on the compounded growth and you lose out on the income tax refund.

The second option is to Maximize your RRSP contribution.

This allows you to start saving for retirement much earlier and benefit from compounded growth.  However, you will have more mortgage interest  to pay.

The third option is to Maximize your RRSP and pay down on your mortgage with the tax savings

This is probably the best option for most as it allows you to work towards both goals.

Next week, I’ll discuss Spousal RRSP’s.