Hi. My name is Jordan & I have an RRSP Problem.

Pay off Mortgage or Invest

RRSP, TFSA & MORTGAGE QUESTIONS

I have a bit of an RRSP problem.  Don’t get me wrong, it’s a good problem to have- but a problem nonetheless.

The problem is twofold.

1- Assuming I keep doing what I’m doing – I’m at the point, where I’ll over contribute to my RRSP next year – so I need to reduce my contributions.

2- I am starting to realize my RRSP may be getting too large – meaning I may in line to pay some hefty taxes in retirement (poor me I know).

I fully understand you may (rightly) be thinking *Shut the fuck up Jordan – you should be happy*  but this is a finance blog so I will continue…

Just over a year ago, I realised this may occur, and I reduced what I was putting into my own RRSP, and opened a spousal RRSP.  I figured it made a lot more sense to have 2 medium sized accounts in retirement (paying lower taxes on each) than one large one (paying higher taxes).  For those not aware, RRSP’s are allowed to grow sheltered from taxes, but once they are withdrawn, you must pay taxes on them.

As of my last monthly update my RRSP balance sits at $261,728.32.

Last year I put just over $18,000/year into RRSP’s.  This was split about 8k into the spousal account and 10k into my own account.

I am currently 35 years old, which means most likely, I wont need this money for 15-25 years.  I decided to run a couple scenarios to see what I could be looking at in (early) retirement.

RRSP Scenarios:

 

Continue to Contribute 10,000/Year
Age 7% return 5% return
45  $      662,695.21  $      558,395.73
50  $      990,997.23  $      770,689.30
55  $  1,451,457.78  $  1,041,635.67
60  $  2,097,277.53  $  1,387,439.53
Stop Contributing Completely
Age 7% return 5% return
45 $514,859.22 $426,327.85
50 $722,116.69 $544,114.38
55 $1,012,806.01 $694,443.15
60 $1,420,512.83 $886,304.99

As you can see, all the scenarios look pretty good – even the paltry 5% return, assuming I never put another cent into my  RRSP account would grow to over a million by age 65.  That said, I always planned on retiring early and have fully expected to start withdrawing from the RRSP before age 60.  This also doesn’t take into account my wife’s RRSP (albeit currently a small amount) or either of our TFSA’s.

RRSP is Full

A few other notes about my situation:

  • Assuming no changes, my mortgage will be paid off when I am 55 years old
  • At age 60 I can start receiving CPP (Canada Pension Plan)
  • At age 65 I can receive the OAS (Old Age Security)
  • I still have unused TFSA contribution room (as does my wife)

I expect I will need to work until my mortgage is paid off.  Once the house is paid off, my monthly expenses will go WAY down.  Aside from the mortgage expense being eliminated, I will also no longer be investing or paying for daycare.  To give you an idea how much those 3 things will reduce my expenses by:

Current Mortgage/Investments/Daycare cost per month: $4300

Those 3 expenses account for around 65% of all my current expenses. (Over 75% once I give up my Winnipeg Jets season tickets after this season).

So the question is – what exactly SHOULD I do going forward.  The way I see it, I have a few options.

  1. Put the full $18,000/year into the spousal RRSP (continue to get a decent tax refund which can be used to put into TFSA or down on mortgage).
  2. Continue to put $8-10k into the spousal and the rest into TFSA until it is maxed
  3. Pay down the mortgage faster

Mortgage Paydown VS More Investments

This is one of those topics that has been discussed to death, so I’m not going to go into major detail on it.  Usually the argument boils down to:

Assuming interest rates stay low-  over time you will have a better return investing vs paying off your mortgage. 

That said, my goal is now to reduce taxes in retirement, not to build the largest nest egg possible.  There is also something to be said for piece of mind.  I’ve never been mortgage free on a primary residence – but I can only imagine it feels fuckin’ fantastic.  On the other hand, if your investments can churn out enough cash (tax free or otherwise) to pay all your expenses – it’s basically the same thing).

It seems like reducing/eliminating RRSP contributions and a mix of increased TFSA contributions & a quicker mortgage pay down is the best option for me.  If the ultimate goal is not needing to work, having no mortgage is probably the most sure fire way to get there as quickly as possible.

So there…it’s settled.  I’ll stop putting money into RRSP’s, and start paying down the mortgage/maxing out the TFSA…..

An argument for continuing to dump more into RRSPs…

Awww shit, just when I thought I had it figured out.

Doh Investing is hard

Alas, there are still a couple reasons it may make sense for me to contribute to an RRSP.

  1. I am still in a higher tax bracket, so getting the tax savings now and using that juicy refund to pay down the mortgage is an option (If I do this – it would be into the spousal RRSP).
  2. RRSP contributions bring down your total taxable/net income.  The government of Canada currently gives parents a cheque each month (tax free) based on their kids ages and taxable income.  This means while my kids are still young, it makes sense to get my taxable income as low as possible, to get as much tax free $$$ from the government as possible.

I apologise if this post is coming across like a conversation with myself – but that is exactly what it is.  I’ve been trying to convince myself exactly what I should do, and ensure I make the right decision.  I haven’t made a decision yet, but I am currently leaning towards:

  • Stop all RRSP contributions in my own account
  • Increase spousal contributions to around $12,000 and put the rest into TFSA
  • Use tax refund to make lump sum payment on mortgage
  • Continue to do this until children are no longer eligible for Child Benefit and/or spousal RRSP starts getting large enough that I feel comfortable reducing the contributions
  • Once spousal contributions are reduced, max out TFSA’s each year and put all extra onto mortgage

 

What do you think?  Does this make sense? Would you do something similar or am I way off here?  Does anyone else have similar concerns, or has anyone gone through this exercise already?  Let me know in the comments!

Lastly, I’d like to give a shout out to Mark from Myownadvisor who wrote an excellent post about this a year or two ago as well which I thoroughly enjoyed.

Cheers!

7 Comments on “Hi. My name is Jordan & I have an RRSP Problem.

  1. Funnily enough, I was thinking of posting a similar blog article on my site…maybe this will motivate me to think more & write about it.

    Its a question I keep revisiting every few months and I dont know if theres a correct answer. Situations change for each individual/couple over the course of lifetime and what applies to one couple may not apply to another.

    In our case, we have decided to do a bit of everything and have appropriate capital allocation for RRSPs, TFSAs & debt repayment. My wife has a good defined benefit pension plan, but I dont. So, for my retirement savings, I focus more on RRSP contributions + the fact that once I have paid my taxes on the income for the year, its gone. But in the future (in retirement), I can deplete the account at a pace of my choosing and adjust based on what tax bracket I want to be in. From my wife’s savings, we do more TFSA focus and debt repayment. We like the idea of being (mortgage) debt free in the next 10 yrs give or take. Yes, we can probably earn more with investing the funds than the debt load of the 2-3% these days, but psychologically, we like the idea of getting rid of debt overhang.

    Hope you find the right option for your family.

    cheers
    R2R

    Like

  2. That’s a tough one, Jordan. I make no recommendations, but this is what I would do in your situation.

    I would stop contributing to RRSP because it is getting oversized. You will have to convert that to RRIF before you’re 71 and take minimal withdrawals, wich will affect your CPP and OAS payments.

    But this is me. Im not in the highest tax bracket and my employer doesn’t match rrsp contributions. I have a supplementary pension plan that I pay into which gets deducted from my taxes.

    I would focus on TFSA contributions until they are maxed out. You have a long way to go to max them . Later on when you withdraw money from TFSA , you will not be taxed and it will not affect your pension payments.

    Then I would focus on mortgage payments to pay it out faster. You mentioned you want to pay it by 55, try 45. It’s an amazing feeling to be mortgage-free. The faster you take care of that mortgage, the faster you can retire.

    You can monitor your situation and come back to this question a year later. Plan how much money you will need to cover all your expenses once you’re debt-free. In most cases, to live in Canada 2.5K per month is enough for a couple assuming they are debt free. Factor in inflation for basic needs and property costs like taxes, insurance, utilities, repairs.

    No worries, these are good to have problems :):)

    Liked by 1 person

  3. Thanks Guys!

    Neither the wife nor I have any sort of defined pension – so the retirement is completely up to us.

    I think i’ll also need to do a bit more research on RRIF rules, OAS clawbacks, and CPP amounts as well.

    Thanks again

    Like

  4. Wow, you’ve got a nice sizeable RRSP, that’s a great problem to have! I agree to get the income down so that you can get more CCB money. Take advantage while you can, free government money is great!

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  5. Have you considered overfunding a permanent life insurance policy (joint last to die) to hedge your bets? If things DON’T go according to plan and you both die at an inopportune time (prematurely) then all reg’d money is taxable that year and welcome to 53% tax. It would seem you are currently conscious of taxes (year to year) but ignoring the whopper balloon tax bill if you both die young.
    The benefit – the insurance can be a multi-tool – allowing for much tax-sheltered growth for use later in life (no gun to your head to initiate withdrawals at 71 or any other age) with the side benefit of helping pay the whopper tax bill should misfortune strike.
    This may be a great destination for excess funds after the TFSAs are maxed.
    Just my opinion….

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  6. Max out your TFSA and pay the mortgage.
    Basic personal amount: you can withdraw 9382 (manitoba 2019) and 11809 (canada) form your RRSP/ year tax free because you would be in the lowest tax bracket. You take out from your TFSA the balance for your living needs + dividend income

    EX: Money needed / year: 35 000 $
    RRSP withdrawals: 12 000 — > Tax: Manitoba: 282 $ Canada: 0 Balance: 11718
    Dividend income from registred account : 10k Tax — > 0
    TFSA withdrawal: 13 882 Tax —> 0

    35 000 $ and only 282 $ in tax.
    The CPP and OAS revenu are tax free.

    It all depends on your living needs. Plus if you want to pay low tax, you can withdraw from RRSP only to not exceed the first tax bracket wich is 15% federal and 11% manitoba.

    NB: Make sure that stopping your RRSP contributions doest not cut all you child tax credit.
    Nb2: You could contribute to your child RESP instead

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  7. Pingback: Stock Talk: ETF’s, Algonquin, Power, Artis & Interrent Reit – MoneyMaaster.com – Canadian Dividend stocks & Personal finance

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