RRSP, Mortgage and TFSA – What’s the Best Investment Strategy For You?

Contributing to an RRSP, paying down a mortgage and investing in a TFSA are all very important pieces of a complex investment strategy. As an investment advisor, I would help you to navigate the pros and cons of all three, bearing in mind your unique circumstances. The discussion below addresses some of the key considerations as you try to decide on the best investment strategy for you.

Paying down a mortgage:

If your goal is to pay down your mortgage quickly, there is a simple method that can be used to “tip” the math in favour of the borrower, instead of the bank. I call it “mortgage tipping”. Most financial institutions that offer mortgages will provide an amortization schedule, upon request. This is simply a breakdown of monthly payments that identifies interest and principal portions, separately, for all payments. It also demonstrates how this balance changes with each mortgage payment. When you first review the amortization schedule, you might be surprised by how disproportionate the balance is between interest and principal mortgage payments, especially on a newer mortgage.

Houses are normally considered to be illiquid assets because they aren’t usually the asset earmarked to eventually provide retirement income or emergency cash, since that would require selling or getting a second mortgage. This means that you will want to balance your mortgage payments with other considerations, including short term needs for liquid assets for cash and long term needs for a retirement plan. The “mortgage tipping” strategy will help you to identify the mortgage payment plan that accelerates your mortgage payments at a rate that minimizes overall interest payments but still leaves an appropriate amount of funds available for contributions to RRSP accounts and /or investing in a TFSA, depending on your investment goals.

Contributing to an RRSP:

The Retirement Savings Account (RRSP) allows for long term savings with tax advantages. Like its name, “retirement account”, it is meant to be a savings tool to provide an income for retirement. It’s not meant to serve short term financial needs.

Frequent early withdrawals from an RRSP account will involve taxes and, in most cases, fees. Investments removed from an RRSP prior to retirement cannot be re-contributed in a later year. The exception would be for Government approved plans such as the home buyers or life long learning programs.

When an RRSP is used correctly it can provide a great forum to:

* Shelter investment growth, such as dividends, interest income and capital gains, from being taxed

* Make contributions tax deductible on personal income tax

* Provide a pool of capital to be used as income during retirement

Investing in a TFSA account:

The Tax Free Savings Account (TFSA) is a new type of account that has more flexibility than an RRSP because frequent or early withdrawals are not penalized. There are also tax benefits to the TFSA, with some similarities to the RRSP, in the sense that investment growth is tax free. In contrast to the RRSP, this account can be used as a general savings account, which can be tailored to meet any of your financial goals rather than simply be restricted to retirement.

RRSP, Mortgage and TFSA – finding the best investment strategy for you:

RRSP, residential property and TFSA are all assets that should grow over time, at different stages and in different increments.

Ideally, it’s wise to have both an RRSP account as well as a TFSA account and to contribute to both while paying down mortgage debt, at the same time. Keep in mind that an RRSP and a TFSA are simply accounts and that money can be deposited into either within the limits outlined by the Federal Government, just like a chequing or saving account. The difference is what happens to the money while it’s in the RRSP and TFSA. Both can be deemed investment accounts. That means the money can be invested in suitable investment products so that it has a chance to grow depending on how your financial needs and goals balance out over the long and short term.

Allotting monthly savings to all three assets can be one of the best ways to increase personal wealth, over time.

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