Q. In regards to savings, do I pay down my mortgage or put into RRSPs?
A. Fortunately, this isn’t a question of “either or”. You can in fact do both. Here’s how.
The first step is to check your RRSP situation and your contribution room (the amount you can still put into your RRSP without going over your limit). You are allowed to contribute up to 18% of your gross annual wages, minus your contributions to a pension plan – for up to $21,000 per year in 2009. You can easily find out how much room you have by checking your last tax statement when you filed your income taxes, or you can call the Canada Revenue Agency and they will tell you.
With that knowledge, here’s step two: Take your savings and put as much as you can into your RRSP. Typically, that will mean you will get a tax refund when you file your income tax next year.
Step three is to put the money you receive from your refund and use it to pay down your mortgage. You might say it’s like the government helping you make your mortgage payments! Rather than paying taxes, you can pay yourself.
That all takes a certain amount of discipline, but the effort is well worth it. If you want to continue doing this every year, then we suggest setting up a monthly contribution plan for your RRSPs, which you can do through our RRSP Wealth Accumulator. It’s an easy and convenient automatic deposit out of your chequing account, and you can start with as little as $25 a month. You can set it up on a monthly, bi-weekly or even weekly basis. Many contributors have it correspond with their regular pay periods.
Remember, too, that setting up a monthly contribution plan is not the same as “making payments”. Quite the opposite. You’re actually paying yourself, and getting rewarded with a tax benefit as well. Some of our members like it for one other reason: it avoids the temptation to spend the money if it were just sitting in a savings or chequing account.
By the way, we really like hearing questions such as yours, because it demonstrates smart financial thinking on your part. Asking questions is the best way to get good answers. And the best people for those answers are qualified financial advisors. This might be a very good time to make an appointment with an advisor to go over not only your RRSP and mortgage strategy, but also the bigger picture of your financial situation and goals. You could end up over the long term with many thousands of extra dollars in your wallet that you might otherwise never see. At the very least, you will have the satisfaction and secure feeling of knowing you’re doing the right things in the right way. By the sounds of it, you’ll be retiring comfortably and living in a mortgage-free home!
