Winnipeg Free Press - PRINT EDITION

Put your money where your house is... or not

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Pay your mortgage or contribute to an RRSP: How many times have you asked yourself or someone else which to do?

The first thing you should do is condition your mind to filter out biased advice. The last thing in the world a bank wants you to do is choose to pay off your mortgage. Assuming you pay no penalties, the bank loses income if you pay your loan off early. But it also loses out on potential fees it might earn from selling RRSP-eligible investments.

Banks do what's good for banks first, not what's good for you, necessarily. Having said that, there are clearly instances where doing one or the other is the proper thing to do. If your mortgage rate is four per cent, for instance, it doesn't make much sense to race to pay it off. Four per cent money is a pretty good deal historically. The case for not touching your mortgage and making that RRSP contribution makes even more sense if you pay a relatively high marginal tax rate, say 45 per cent.

Your $10,000 contribution gets you a $4,500 refund. You are effectively $4,500 richer. It's true you've also created a future tax liability. That is, when you withdraw that money, plus what it's earned, in your golden years you will pay income tax on it. I've heard a lot of financial planners strive to make the point RRSP refunds aren't yours, it's still the government's cash and you'll eventually have to pay it. True, generally. But that's no reason not to take advantage of it.

Remember, the money you put away is compounding tax-free and your tax refund can be put to work, too, either saved in a tax-free savings account as a reserve to pay that tax bill or applied to a mortgage.

And the further off in the future your retirement, the less this matters because of what we call the time value of money. Just as saving money today and watching it compound over the years can lead to a huge amount of money in the future, a future expense is worth less today -- and a lot less if there are a lot of years between now and when you have to pay it and/or the rate at which you can save money is high.

Your $4,500 compounding in a TSFA at the same rate as your RRSP will most likely pay your tax bill and then some. More importantly, having the money in your RRSP gives you a lot of flexibility to control your tax bill. It's hard to put a value on that, but it's worth a lot.

Not all arguments on the subject are financial. I know people who literally get ill at the thought of their savings dropping in value. They can only invest in GICs and money market funds. These people might be better off just paying the mortgage because they can't really take advantage of interest rates. They're hurt by them.

That's just one example of the kind of considerations you should make when it comes to these decisions. Some, in my view, are a lot easier, like RESPs. These are a no-brainer because the government gives you, free, 20 per cent of what you put in (to a certain limit). That's a guaranteed 20 per cent return. It's just foolish not to find a way to take advantage of that -- even, in the right circumstances, if it means borrowing. Rates are low, and the money you put away today will save you a lot in the future.

Fabrice Taylor is an award-winning financial journalist and analyst and author of the President's Club Investment Letter. Email him at:

fabrice.taylor@gmail.com

Republished from the Winnipeg Free Press print edition January 14, 2012 B5

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