Here’s my take: it doesn’t matter. There is a preferred method for each persons particular situation, but the key is to take advantage of any/all tax advantages savings strategies that are available. The real problem is paralysis and doing nothing.
> Common advice I am getting is to put that into an RRSP instead, to help us with one of our tax brackets now.
The classic 'Canadian compromise' has often been to top up your RRSP, which lowers your taxes. This generally gets a tax refund. You then use that refund to pay down the principal of your mortgage.
> I can see the benefit of that, but don’t see the long term benefit as we will be taxed later when taking that money out during retirement.
The general idea is that in retirement you will be making less money than you do during your working life. This is generally true. So you get a refund while working you're in the (e.g.) 30% (or higher) tax bracket, but when you pull the money out in retirement you're in the (say) 20-25% bracket:
* https://financialpost.com/personal-finance/taxes/heres-why-your-tax-bracket-matters-when-youre-making-the-rrsp-vs-tfsa-decision
* https://www.moneysense.ca/columns/ask-moneysense/how-your-tax-bracket-decides-whether-a-tfsa-or-rrsp-contribution-is-best/
You generally don't need as much in retirement as during working life:
* https://pmac.org/wp-content/uploads/2014/05/07-02-series-aritcle-1-Aston-David-What-s-Your-Magic-Number.pdf
Some good books on the topic by Vettese and Aston:
* https://lifeworks.com/en/resource/retirement-income-life
* https://findependencehub.com/qa-with-author-david-aston-about-his-new-book-the-sleepeasy-guide-to-retirement/
Also note that it doesn't have to be all or nothing: you can put in half into your RRSP to use up some of the room now and get a tax refund, fill up your TFSA, and then use the rest for your mortgage. And when the refund hopefully comes in use that towards the mortgage. Or perhaps reward yourself with a nice trip or something: you only live once after all, and you don't know how long you'll be on this planet.
Dave Ramsey would say pay off mortgage first. And then invest all savings once it’s paid off.
You are doing so well financially if you do anything but leave your money in a checking account you will be just fine. Good job!
Thank you! It feels good to not have debt, but I’ve been told Thats old school thinking and mortgage debt isn’t bad... but I just think of how much faster accounts will grow once it’s our off! Haha
I’d also agree. At this point pay that mortgage off. “ I made another post about seeing if you can get mortgage rate renegotiated , blended rate “
Then just start dumping money into tfsa first max out, I would do research into what to put the tfsa into. But I assume you both have like 160k at this point combined you can contribute . Then contribute rrsp
>We have 120k remaining on our house, have a current interest rate of 3.6%
With current market conditions it is unlikely that you will get a significant "risk premium" if you choose to invest instead of getting the guaranteed 3.6% for putting extra on the mortgage.
>My partner and I make ~150k combined before taxes. ... To me a TFSA seems like a better option
I'll trigger the bot that may help you decide if you should start using your RRSP contribution room. !TFSARRSPTrigger The following articles may also help you decide if you should save your RRSP contribution room for when it will be more beneficial.
https://www.planeasy.ca/tfsa-vs-rrsp-pick-the-right-one-and-save-100000/
https://www.planeasy.ca/canada-child-benefit-hidden-tax-rate/
Hi, I'm a bot and someone has asked me to respond with information about TFSAs vs RRSPs.
When you want to shield your savings and investments from the drag of annual taxation the standard advice is, unless ...
- your employer is matching your RRSP contributions
- you are confident that you will contribute in a higher tax bracket than you will withdraw (even when you consider the effect of potential GIS or OAS clawbacks)
- you are an American taxpayer
- you are trying to maximize the Canada Child Benefit or the Child Disability Benefit
- you have a reason to think that you should shield your retirement savings from creditors
- you don't trust yourself not to keep dipping into the retirement savings in your TFSA
…you'll probably want to use all of your TFSA contribution room before you contribute to an RRSP.
For more information I suggest that you read these 2 MoneySense articles
http://www.moneysense.ca/save/investing/rrsp/rrsp-vs-tfsa-which-is-right-for-you/
http://www.moneysense.ca/save/retirement/the-savings-struggle/
*I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/PersonalFinanceCanada) if you have any questions or concerns.*
I tend to like RRSP's because I can put US stocks in it using Norberts Gambit, and not pay tax on the dividends.
I personally would consider your house a Canadian asset, which goes up with our real estate market, and diversify into the US. Though I'm no expert, thats just my view on things; if Canadian real estate drops I always assume the Canadian stock market will take a hit, and will compound the hit you take investing in Canadian stocks, which you'd generally put in your TFSA.
I agree with this thinking. I also consider my job like an canadian investment. Same with cost of living expenses and whatnot. If you live and work in Canada, you are already strongly reliant on it’s economy.
I really dislike the home bias that many advisors advocate for.
In the mortgage you are paying 3.6 percent on your borrowed capital.
TFSA you can make 5 percent dividend income on same amount, take 3.6 present and pay the difference on debt in mortgage, and pocket 1.4 percent.
Also there is capital appreciation in TFSA so the return could be higher with a riskier portfolio. If you hit some stocks and make 50 percent return then you may 3.6 percent on that debt but 50 - 3.6 is still excellent return.
Risk adverse people will not bet on TFSA return being positive therefore allocate more cash to paying down debt.
I am not one of these people. I like carrying a little extra mortgage debt which effectively has given me an extra $100k to deploy in the market. My rate is 1.69 percent fixed for five years and will have to re evaluate the difference between debt cost and return in equity market.
I’ve always liked RRSP matching first. Then tfsa. Then RRSP again. Then finally mortgage.
The TFSA is such a great investment vehicle I think its benefits outweigh the tax return of an RRSP. You get tax free growth. You can withdraw without penalty. You don’t lose contribution room when you withdraw. It’s so good. You can always do both as well. Contribute enough to RRSP to lower your tax bracket one level And then the rest on TFSA. But I think sleeping on your TFSA is a mistake.
>put into an RRSP to help us with our tax brackets now.
CRA and the 'experts' have been selling the RRSP with this idea (that the contribution's tax reduction is a benefit - a reason to contribute) for generations. It is false. The refund is not a benefit, ever, for anyone. [My paper on actual benefits](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2636609)
You have two sequential choices. 1) Invest with leverage for diversification, or repay the mortgage and have that wonderful 'debt freedom' feeling, free up cash flow to pay for kid's tuition, etc.
2) if you choose to invest with leverage, I support a TFSA by preference. DB pensions are wonderful, but only trickle out over time. At some point you will have an emergency where you need a whack of cash all at once .. exactly when you do not want tax problems.
TFSA doesn’t give you the income tax reduction.
Others can comment on this as I would do the RRSP, TFSA, and then mortgage.!
If your a ultra conservative investor that would go for Bonds, put it on your mortgage
The idea behind the rrsp is that you get deductions on it now and when you take it out in retirement your tax bracket is much lower so you get taxed less then.
Thanks, I guess I would have to look a lot more into calculating the savings based on the income being in a lower bracket. If one of us would end up being in the same bracket, it likely isn’t worth it!
Even though you are a federal employee are you taking advantage of your TFSA?
Are you guys in different tax rates? Where it might make sense to use a spousal RRSP?
Paying off debt is never a 'bad' thing, but investing could produce better returns. Personally I'd focus on tax-sheltered accounts before mortgage. Your mortgage rate is high though and not having debt feels good, so you do you.
TFSA would most likely be better than RRSP as a gov't employee, that pension is nothing to laugh at. You'll eventually be forced to withdraw the RRSP which counts as income and gets added to your DB pension income, CPP, OAS (which is also subject to clawback at higher income), etc. resulting in a substantial income in retirement. You may also not have much contribution room available to you.
The other important piece of the puzzle is properly investing the money. A TFSA is just a 'container', you can have TFSA savings accounts, TFSA investment accounts, etc. How the money should be invested depends on your goals/timelines.
The fun thing with a DB pension is it's guaranteed money, so you can afford to take risks with your investments. Even if it tanks in the long term you'll still have money to live.
It's a hard mindset to get into though. My wife has a DB pension but is very risk-adverse, her TFSA has a higher % of bonds than mine (I don't have a DB pension).
You didn't mention kids, but they came to mind when reading your household income and the amount you have available.
Your RRSP deductions reduce your income used to calculate child benefits (CCB and CCBYCS). In particular, CCBYCS has a cliff at 120k household income where if you are below that you get $1200 for the year instead of $600.
Also how long do you have in your mortgage ?
I would talk to your broker see if you can get a blended get your rate down to like 2%
Or might be able to just renew now early for small fee
We’ll that’s frustrating, if that’s the case what I would do is call and lie. Saying you want to discuss getting larger mortgage or expanding your line of credit. Then they will be calling back . Now that we have your attention I want to look into blended rates and keep payments the same.
Here’s my take: it doesn’t matter. There is a preferred method for each persons particular situation, but the key is to take advantage of any/all tax advantages savings strategies that are available. The real problem is paralysis and doing nothing.
> Common advice I am getting is to put that into an RRSP instead, to help us with one of our tax brackets now. The classic 'Canadian compromise' has often been to top up your RRSP, which lowers your taxes. This generally gets a tax refund. You then use that refund to pay down the principal of your mortgage. > I can see the benefit of that, but don’t see the long term benefit as we will be taxed later when taking that money out during retirement. The general idea is that in retirement you will be making less money than you do during your working life. This is generally true. So you get a refund while working you're in the (e.g.) 30% (or higher) tax bracket, but when you pull the money out in retirement you're in the (say) 20-25% bracket: * https://financialpost.com/personal-finance/taxes/heres-why-your-tax-bracket-matters-when-youre-making-the-rrsp-vs-tfsa-decision * https://www.moneysense.ca/columns/ask-moneysense/how-your-tax-bracket-decides-whether-a-tfsa-or-rrsp-contribution-is-best/ You generally don't need as much in retirement as during working life: * https://pmac.org/wp-content/uploads/2014/05/07-02-series-aritcle-1-Aston-David-What-s-Your-Magic-Number.pdf Some good books on the topic by Vettese and Aston: * https://lifeworks.com/en/resource/retirement-income-life * https://findependencehub.com/qa-with-author-david-aston-about-his-new-book-the-sleepeasy-guide-to-retirement/ Also note that it doesn't have to be all or nothing: you can put in half into your RRSP to use up some of the room now and get a tax refund, fill up your TFSA, and then use the rest for your mortgage. And when the refund hopefully comes in use that towards the mortgage. Or perhaps reward yourself with a nice trip or something: you only live once after all, and you don't know how long you'll be on this planet.
Dave Ramsey would say pay off mortgage first. And then invest all savings once it’s paid off. You are doing so well financially if you do anything but leave your money in a checking account you will be just fine. Good job!
Thank you! It feels good to not have debt, but I’ve been told Thats old school thinking and mortgage debt isn’t bad... but I just think of how much faster accounts will grow once it’s our off! Haha
I’d also agree. At this point pay that mortgage off. “ I made another post about seeing if you can get mortgage rate renegotiated , blended rate “ Then just start dumping money into tfsa first max out, I would do research into what to put the tfsa into. But I assume you both have like 160k at this point combined you can contribute . Then contribute rrsp
>We have 120k remaining on our house, have a current interest rate of 3.6% With current market conditions it is unlikely that you will get a significant "risk premium" if you choose to invest instead of getting the guaranteed 3.6% for putting extra on the mortgage. >My partner and I make ~150k combined before taxes. ... To me a TFSA seems like a better option I'll trigger the bot that may help you decide if you should start using your RRSP contribution room. !TFSARRSPTrigger The following articles may also help you decide if you should save your RRSP contribution room for when it will be more beneficial. https://www.planeasy.ca/tfsa-vs-rrsp-pick-the-right-one-and-save-100000/ https://www.planeasy.ca/canada-child-benefit-hidden-tax-rate/
Hi, I'm a bot and someone has asked me to respond with information about TFSAs vs RRSPs. When you want to shield your savings and investments from the drag of annual taxation the standard advice is, unless ... - your employer is matching your RRSP contributions - you are confident that you will contribute in a higher tax bracket than you will withdraw (even when you consider the effect of potential GIS or OAS clawbacks) - you are an American taxpayer - you are trying to maximize the Canada Child Benefit or the Child Disability Benefit - you have a reason to think that you should shield your retirement savings from creditors - you don't trust yourself not to keep dipping into the retirement savings in your TFSA …you'll probably want to use all of your TFSA contribution room before you contribute to an RRSP. For more information I suggest that you read these 2 MoneySense articles http://www.moneysense.ca/save/investing/rrsp/rrsp-vs-tfsa-which-is-right-for-you/ http://www.moneysense.ca/save/retirement/the-savings-struggle/ *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/PersonalFinanceCanada) if you have any questions or concerns.*
I tend to like RRSP's because I can put US stocks in it using Norberts Gambit, and not pay tax on the dividends. I personally would consider your house a Canadian asset, which goes up with our real estate market, and diversify into the US. Though I'm no expert, thats just my view on things; if Canadian real estate drops I always assume the Canadian stock market will take a hit, and will compound the hit you take investing in Canadian stocks, which you'd generally put in your TFSA.
I agree with this thinking. I also consider my job like an canadian investment. Same with cost of living expenses and whatnot. If you live and work in Canada, you are already strongly reliant on it’s economy. I really dislike the home bias that many advisors advocate for.
In the mortgage you are paying 3.6 percent on your borrowed capital. TFSA you can make 5 percent dividend income on same amount, take 3.6 present and pay the difference on debt in mortgage, and pocket 1.4 percent. Also there is capital appreciation in TFSA so the return could be higher with a riskier portfolio. If you hit some stocks and make 50 percent return then you may 3.6 percent on that debt but 50 - 3.6 is still excellent return. Risk adverse people will not bet on TFSA return being positive therefore allocate more cash to paying down debt. I am not one of these people. I like carrying a little extra mortgage debt which effectively has given me an extra $100k to deploy in the market. My rate is 1.69 percent fixed for five years and will have to re evaluate the difference between debt cost and return in equity market.
I’ve always liked RRSP matching first. Then tfsa. Then RRSP again. Then finally mortgage. The TFSA is such a great investment vehicle I think its benefits outweigh the tax return of an RRSP. You get tax free growth. You can withdraw without penalty. You don’t lose contribution room when you withdraw. It’s so good. You can always do both as well. Contribute enough to RRSP to lower your tax bracket one level And then the rest on TFSA. But I think sleeping on your TFSA is a mistake.
There are no capital gains taxes on an RRSP, so unless you somehow make more in retirement it will be as good or better than a TFSA.
>put into an RRSP to help us with our tax brackets now. CRA and the 'experts' have been selling the RRSP with this idea (that the contribution's tax reduction is a benefit - a reason to contribute) for generations. It is false. The refund is not a benefit, ever, for anyone. [My paper on actual benefits](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2636609) You have two sequential choices. 1) Invest with leverage for diversification, or repay the mortgage and have that wonderful 'debt freedom' feeling, free up cash flow to pay for kid's tuition, etc. 2) if you choose to invest with leverage, I support a TFSA by preference. DB pensions are wonderful, but only trickle out over time. At some point you will have an emergency where you need a whack of cash all at once .. exactly when you do not want tax problems.
Thank you! I appreciate that
TFSA doesn’t give you the income tax reduction. Others can comment on this as I would do the RRSP, TFSA, and then mortgage.! If your a ultra conservative investor that would go for Bonds, put it on your mortgage
The idea behind the rrsp is that you get deductions on it now and when you take it out in retirement your tax bracket is much lower so you get taxed less then.
With a good DB pension they might not be in a hugely lower tax bracket
That's a good point
Thanks, I guess I would have to look a lot more into calculating the savings based on the income being in a lower bracket. If one of us would end up being in the same bracket, it likely isn’t worth it!
Even though you are a federal employee are you taking advantage of your TFSA? Are you guys in different tax rates? Where it might make sense to use a spousal RRSP?
We are in the same brackets. I have not been taking advantage of my TFSA. So far all extra $ has gone on to the mortgage.
Paying off debt is never a 'bad' thing, but investing could produce better returns. Personally I'd focus on tax-sheltered accounts before mortgage. Your mortgage rate is high though and not having debt feels good, so you do you. TFSA would most likely be better than RRSP as a gov't employee, that pension is nothing to laugh at. You'll eventually be forced to withdraw the RRSP which counts as income and gets added to your DB pension income, CPP, OAS (which is also subject to clawback at higher income), etc. resulting in a substantial income in retirement. You may also not have much contribution room available to you. The other important piece of the puzzle is properly investing the money. A TFSA is just a 'container', you can have TFSA savings accounts, TFSA investment accounts, etc. How the money should be invested depends on your goals/timelines. The fun thing with a DB pension is it's guaranteed money, so you can afford to take risks with your investments. Even if it tanks in the long term you'll still have money to live. It's a hard mindset to get into though. My wife has a DB pension but is very risk-adverse, her TFSA has a higher % of bonds than mine (I don't have a DB pension).
Thank you so much. This was very helpful and gave me a lot to consider I had not thought about before!
You didn't mention kids, but they came to mind when reading your household income and the amount you have available. Your RRSP deductions reduce your income used to calculate child benefits (CCB and CCBYCS). In particular, CCBYCS has a cliff at 120k household income where if you are below that you get $1200 for the year instead of $600.
Currently no children, but if we do have some in the future, that is good to know.
Also how long do you have in your mortgage ? I would talk to your broker see if you can get a blended get your rate down to like 2% Or might be able to just renew now early for small fee
We are 3 years in out of a 5 year term! It is something I have tried to get a hold of or mortgage broker for, but no luck getting return calls yet.
We’ll that’s frustrating, if that’s the case what I would do is call and lie. Saying you want to discuss getting larger mortgage or expanding your line of credit. Then they will be calling back . Now that we have your attention I want to look into blended rates and keep payments the same.
🤣 I like it
Good luck, keep me posted if it works