Using Maxed RRSP return on Mortgage??

[Slippin3]

Hi Guys,

I wont move into my new house until October (assuming it is ready then), but am looking into some ways to best handle my money when that does happen. Below are some numbers that I came up with. Keep in mind these are rounded numbers, and dont take a lot of variables into consideration (raises, bonuses, interest on RRSPs, Mortgage rates in the future, etc)

Salary #1 - $80,000
Salary #2 - $50,000
Combined Salary - $130,000

Mortgage Amount - $200,000 ($82K DP)
Mortgage Rate - 5.25%
Amortization - 25 years
Payment Freq - Bi-Weekly Accelerated
Payment Amount - $600/bi-weekly

RRSP Limit: $23,400 (per year). This is 18% of our combined pay.
Tax Return - $9360 (assuming a 40% bracket was taxed).

If we take this return, and put it into paying off the principal of the house, we will have the house paid for in about 11years?! We will also have an RRSP of $257,400.


Am I on the right track here? I know a lot of variables are missing, but is the general gist of things on the right track?

Thanks, this forum is great ;)

-John

[AllWheelDrift]

I think what you're describing is a fairly safe approach.

You don't seem to have factored in any growth of your RRSP investments or income though. Also, if you expect your incomes to grow, you may not want to claim all your RRSP contributions right away. Furthermore, assuming those two salaries are for two people, the 50k person won't be in the 40% bracket. Even the 80k person probably won't get a full 40% back on their RRSP contribution. (I don't know which province you are in and what the marginal tax rates are.)

Some people rather pay down the mortgage faster. Some people pay down the mortgage, then reborrow the money and invest it outside of an RRSP.

[Slippin3]

Thanks for the reply.

No, I didnt factor in growth in salary or RRSPs. Just keeping it simple right now :). I am 25 and the fiancee is 22 (Living in Ontario). We still have some room in our RRSP cap right now also ;)

As for the tax return on the RRSP contribution, that is the part I am unsure about. Without digging into my financials right now, I looked quickly online, and it seems I am at a 43% tax rate while she is at a 31% rate (I could be reading that wrong). Also, once married, how does that work out? Is the entire combined salary taxed at the highest amount?

Having my house paid off, and a good sized nestegg saved by the age of 35 would be excellent :)

Thanks
John

[Archanfel]

I think it's a good approach. However, there are people who would argue that paying off the mortgage faster is even better. RRSP only defers taxes, so you would have to pay taxes when you take money out of it. If your RRSP growth will be less than 5.25%, it might be better to pay off the mortgage first before contributing to RRSP. I myself think the difference is small enough that either way is good.

[Slippin3]

I think it's a good approach. However, there are people who would argue that paying off the mortgage faster is even better. RRSP only defers taxes, so you would have to pay taxes when you take money out of it. If your RRSP growth will be less than 5.25%, it might be better to pay off the mortgage first before contributing to RRSP. I myself think the difference is small enough that either way is good.


It would need to be more than 5.25% :) Since the RRSP growth is taxed when withdrawn, it would need to be more than that to be beneficial (something I learned here)

There are a few approaches, RRSP only, Mortgage only, and A hybrid of both. I think a mix would be good :)

Now I need to figure out the Tax situation once married. I am glad the numbers are on track (roughly), and I am not missing something large.

-John

[AllWheelDrift]

Your income does not get 'pooled' when you're married, you still get taxed separately.

I'm more familiar with BC's marginal tax rates, since that's where I live, and 80k does not quite put you to 40%. In Ontario it does seems to put you well into the 40% range, though maxing out your contribution drops you to about 33% so your return will be something inbetween. Your fiancee will stay at 31% even if she maxes her contribution. Again, if you expect your income to increase, it may make sense not to claim your maximums. In that case you could still contribute but claim when your income is higher, or you could just save the contribution room and pay off the mortgage faster.

[Slippin3]

Your income does not get 'pooled' when you're married, you still get taxed separately.

I'm more familiar with BC's marginal tax rates, since that's where I live, and 80k does not quite put you to 40%. In Ontario it does seems to put you well into the 40% range, though maxing out your contribution drops you to about 33% so your return will be something inbetween. Your fiancee will stay at 31% even if she maxes her contribution. Again, if you expect your income to increase, it may make sense not to claim your maximums. In that case you could still contribute but claim when your income is higher, or you could just save the contribution room and pay off the mortgage faster.

Thanks for clearing that up :) Now if only I could find a calculator that could give me all of this info. Perhaps I will play around with Quicktax... should give some rough ideas. :)

-John

[Bullseye]

It would need to be more than 5.25% :)

It would only need to be more than that if you were withdrawing RRSP's at a higher marginal tax rate than you were when you contributed, which is something you want to avoid anyways. If you contribute at 43%, and withdraw at 31%, you don't need to beat 5.25% to end up ahead. If you withdraw at the same rate you contributed at, 5.25% would be your breakeven.

Think of it this way, when withdrawing, you won't be at the 31% rate until each person is at $36k taxable income for the year. Most retirees live on less than this, withdrawing at the 21% rate.

As for RRSP tax deferrals, your $50k will be at 31% down to $37,885, and your $80k will be at 43% down to only $75,769. Below $72k, you'll be at 33%

I agree with your idea of doing both paydown and RRSP contributions, hedges your bets.

[jmc0]

It would need to be more than 5.25% :) Since the RRSP growth is taxed when withdrawn, it would need to be more than that to be beneficial (something I learned here)

There are a few approaches, RRSP only, Mortgage only, and A hybrid of both. I think a mix would be good :)

Now I need to figure out the Tax situation once married. I am glad the numbers are on track (roughly), and I am not missing something large.

-John
Most ppl don't like it, but if your RSP is big enough; you can write/hold your mortgage inside the RSP...