Author: kiara

In this article, we share some considerations regarding this common dilemma to help you decide which option is better for you: investing for retirement or paying down your mortgage.

Contributing to an RRSP and paying off your mortgage are choices that can seem equally important. After all, both address really important aspects of your financial life: your retirement and your estate. The right answer for will depend on your individual circumstances. Let’s take a look at each of these options.

Contributing to your RRSP

Contributing to an RRSP can have both short-term and long-term benefits. Contributions to an RRSP are made on a pre-tax basis, offering a tax benefit in the year the money is contributed. The maximum contribution to a RRSP for 2022 is 18% of your earned income, up to a maximum of $29,210. Any unused portion (also known as contribution room) of this limit can be carried forward to a subsequent year.

Additionally, money invested in an RRSP grows on a tax-deferred basis until withdrawn. Investment options typically include mutual funds, guaranteed investment certificates (GICs), ETFs plus individual stocks and bonds.

Besides the tax benefit of pre-tax contributions to an RRSP, the benefit of compound tax-deferred growth within the account may be the biggest benefit of investing in an RRSP.

Paying off your mortgage

Paying off your mortgage can eliminate one of the biggest monthly expenses in a homeowner’s budget. The issue for most people is where will the money to pay off the mortgage come from?

One strategy is to pay an extra amount towards your mortgage on a monthly basis. This will add to the amount of principal that you are paying down each month. Depending on your mortgage balance and the interest rate, this can help you pay off your mortgage several years earlier than if you made only the required payments each month.

Certainly if your mortgage carries a high interest rate it can make sense to pay it off as quickly as possible.

Issue to consider

Age. One issue to consider is your age. If you are older and closing in on retirement, then working to pay off your mortgage early can make sense. It can be very helpful to your retirement budget to eliminate this monthly payment from your budget prior to retiring.

For someone who is younger, it is often better to focus on maximizing contributions to your RRSP as the tax-deferred growth can then accumulate a large sum for retirement. While the returns will depend upon how you allocate your funds among various investments, the power of tax-deferred compounding of investment returns over time can be incredible.

Rates. When weighing an RRSP contribution versus a mortgage paydown, a huge consideration is also the rate you are paying on your mortgage versus the anticipated rate of return on savings in your RRSP. If your mortgage is locked in at 2.5% and you can get a higher rate of investment, an RRSP may be the route to go.

While it is always better to start contributing as much as possible as soon as possible, the power of compounding can still be a major advantage for workers further along in their careers.

Tax liability. Additionally, contributing to an RRSP offers an excellent tax break each year. This tax benefit can be the single largest tax break many people receive each year.

Liquidity. Another consideration is that money tied up inside of a home that is fully paid off is largely illiquid. While you could take out a home equity loan if needed to tap into some of that equity, this puts you right back in the same position as you were before with having a mortgage payment.

Why not do both?

Perhaps the best strategy is to do both.

Contribute as much as you can to your RRSP to take advantage of the opportunity for tax-deferred investment growth over the longer term. In an RRSP, if invested properly, your investments can help you build a solid nest egg for retirement. In the process, look at your monthly budget and determine if there is an amount that you can put towards paying down the mortgage balance each month.

Everyone’s situation is different of course. A good approach to this situation is to look at your monthly cash flow and determine how much you can contribute to your RRSP and how much you can comfortably allocate towards paying down your mortgage more quickly.

An alternative is to determine how much you are saving in taxes from making your pre-tax contributions to the RRSP and allocate some or all of that money towards paying down your mortgage balance early.

A major consideration here is what the interest rate on your mortgage is versus your expected return on your RRSP investments. For most people the RRSP return over time will likely be higher, but not in all cases.

Conclusion

The decision as to whether to focus on saving in an RRSP or paying down your mortgage will vary among people based on their unique circumstances. Talk with one of our advisors to develop a strategy that makes the most sense based on your situation and your goals.

Give us a call at 514-934-0586 (Montreal) or 403-228-2378 (Calgary) to discuss ways to put your tax refund to use and to do a review of your tax withholding to ensure that it is optimal for your situation.

While this article been carefully checked, we cannot and do not guarantee that the information provided is correct, accurate or current. Please speak to your Rothenberg Wealth Management advisor for advice based on your unique circumstances. Rothenberg Capital Management is a member of IIROC and the Canadian Investor Protection Fund.

Are you one of the millions of Canadians set to receive a tax refund this year? Here are some ideas of what to do with those funds.

The good news is that you’ve prepared your tax return and realize that you’re entitled to a refund. This certainly beats the alternative of owing the government money. If you do find yourself in the position of receiving a tax refund, here are six things to consider doing with that money.

1. Splurge

In general, the suggestion to treat yourself comes last on the list of things to do with your refund, if it shows up on the list at all. But if your refund is relatively small, consider treating yourself to something you’ve been eyeing or doing something special, such as going out for a nice meal. Even if you receive a larger return, it is acceptable to take a percentage of it and use it to enjoy yourself.

2. Contribute to your RRSP                                                                                                                          

You might consider a contribution to your RRSP to build up your retirement nest egg. If you have an RRSP, you may have carryover contributions from previous years when you didn’t fully fund your account up to your yearly limit. Taking all or part of your refund and contributing it to your RRSP can help use up some or all your available contribution room and get you one step closer to your retirement savings goals.

You may also receive a potential tax break for the 2022-2023 year since these contributions are made on a pre-tax basis and the funds are only taxed upon withdrawal.

If appropriate for your situation, you might also consider contributing to a spousal RRSP account. This is an income-splitting strategy for couples that can help decrease their collective tax burden.

3. Contribute to your TFSA

Placing your tax refund money into your TFSA to save for a major purchase can be another option to consider.

Contributions to a TFSA do not provide an upfront tax deduction. However, your refund can be placed in a range of income-generating investments, which will grow tax-free inside your account. The advantage is that you can save towards a big goal, such as your first home or a long vacation, and any funds withdrawn are not subject to taxes.

This can offer an advantage in your tax planning in retirement. It is also a way to diversify the taxation of your retirement income sources if you also have an RRSP and have already maxed out your available contribution room.

4. Invest via a taxable account

While the tax advantages of an RRSP or a TFSA are very tempting, investing in a taxable brokerage account also has its advantages. Capital gains are taxed at a favorable rate, so it can make sense to hold investments that are likely to generate sizable capital gains in these accounts while holding income generating investments in an RRSP or TFSA.

Dividends collected on stocks in a taxable brokerage account are also taxed preferentially as opposed to some other income sources. This is because the company has already paid tax on these dividends, and the government does not tax this income again.

Another thing to keep in mind is that funds in a taxable account like an RRSP can be more readily accessible over time than funds held in a tax-sheltered account since they are not subject to the same rules.

5. Pay down debt

If you have outstanding debt such as high interest credit card payments, a personal loan or a mortgage you can consider putting some or all your tax refund towards reducing this debt. You can eliminate or at least reduce the overall amount of the payments on this debt, saving the compounded interest cost over time.

In the case of a mortgage, if the refund is sizable, you could consider making a substantial payment to reduce or eliminate this debt entirely.

There is currently a suspension on the accumulation of interest on student loan debt by the Government of Canada until March 31, 2023. This can be an excellent time to pay off some or all of this debt with your tax refund. Besides reducing your debt, making a payment now can help eliminate additional interest once things return to normal and this suspension is removed.

6. Contribute to an emergency fund

Your refund money can be used to start or add to an existing emergency fund. This is money that is generally held in a liquid, interest-bearing account to be available for an emergency. This might be the loss of a job or a large, unexpected repair that is needed on your home or car.

A rule of thumb says that you should have at least six months worth of your required and necessary expenses in this fund. This should include money to cover payments such as rent or a mortgage, food, a car payment and other expenses that are essential to maintain your regular standard of living. This could also include extras like entertainment, dining out or other discretionary spending although it remains important to prioritize your necessities and those of your dependents.

Review your withholding tax

While not something you would do with the funds from a tax refund, this is a good time to review your withholding tax for the current year to see if it best reflects your situation. Has your income level changed? If so, are you having enough withheld?

Withholding tax refers to the amount of income tax your employer withholds from your paycheck and typically does not consider various deductions normally claimed, such as RRSP contributions, which reduce your taxes payable. If you find yourself getting a sizable refund each year you might consider reducing your withholding tax, so you receive more money with each paycheck.

The takeaway… Prioritize what’s important to you

Getting a hefty refund can be a form of forced saving, but you are not receiving any interest on this money. You could be putting it to better use during the year by investing it. However, it really depends on your current situation and your needs.

Give us a call at 514-934-0586 (Montreal) or 403-228-2378 (Calgary) to discuss the best way to put your tax refund to use and to do a review of your withholding tax to ensure that it is optimal for your situation.

While this article been carefully checked, we cannot and do not guarantee that the information provided is correct, accurate or current. Please speak to your Rothenberg Wealth Management advisor for advice based on your unique circumstances. Rothenberg Capital Management is a member of IIROC and the Canadian Investor Protection Fund.

Using home equity as retirement income can be an interesting option for retiring Canadian baby boomers who have benefited from strong real estate markets over the past two decades.

The options for funding one’s retirement are varied and wide-ranging. The most typical sources of income in retirement include pensions and financial savings, which typically take the form of Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs) and non-registered savings accounts.

Another option that retirees can consider is their home equity. One method for accessing home equity is through a reverse mortgage. A reverse mortgage is a loan that allows you to get money from your home equity without having to give up your home. Depending on several factors, including you and your spouse’s age (both must be at least 55 years old) and the appraised value of your residence, you can borrow up to 55% of the current value of your home. However, reverse mortgages are usually issued for much less than this.

A reverse mortgage can be set up to make periodic payments to a homeowner, or it can be taken as a lump sum. In either case, there are no payments required until the homeowner moves out of the home, passes away or sells it.

There are several advantages and disadvantages to using a reverse mortgage. 

The advantages include:

1. Your net worth may be tied up in the value of your home, especially if its value has grown over the years. A reverse mortgage allows you to access your home equity without having to sell your home. Furthermore, you continue to own your home, and you will never be asked to move or sell your home. Even if the value of the home declines below the balance owing on the reverse mortgage, you can continue to live in the residence for the rest of your life.
2. You can access your home equity without the month-to-month payments you would find on a typical loan, like a Home Equity Line of Credit (HELOC) or a refinance. In fact, no payments are required at all, at least not until you move or sell your home, which is entirely your decision. Payments are thus voluntary, and, as a result, it is impossible to default on the loan.
3. You can choose how to receive your money, whether as a lump sum or at regular intervals. There are no conditions or requirements as to how you spend the money you receive. You can use a reverse mortgage for anything from paying off an existing mortgage to renovating your home or helping your family.
4. Since this source of income is technically a loan and not income, it is available on a tax-free basis. Furthermore, any payments received from a reverse mortgage are not considered when determining eligibility for Old Age Security (OAS), Guaranteed Income Supplement benefits (GIS), or Canadian Pension Plan (CPP) nor do they affect any benefits you may be receiving.
5. Unlike some other types of loans, income and credit scores are not considered for eligibility for a reverse mortgage. However, because of mortgage rules and regulations in Canada, you may be required to submit them.
6. You can never owe more than what your home is worth. If your home falls in value, the reverse mortgage lender takes the loss.

The other side of the coin… The disadvantages include:

1. One of the most significant disadvantages of reverse mortgages is the noticeably higher interest rates. In effect, the interest rates charged on reverse mortgages tend to be materially higher than the rates charged on similar types of lending products such as a traditional mortgage or a HELOC. For example, Canada’s largest reverse mortgage provider currently charges 5.49% on reverse mortgages with a 5-year term. Meanwhile, major Canadian banks are offering regular mortgages for 2.65% (as of April 2020). The percentage points difference will significantly reduce a homeowner’s equity, particularly given the effects of compounding when no payments are made before selling (like almost all mortgages in Canada, it compounds semi-annually). For this reason, it’s important to compare solutions.
2. The equity you hold on your home may go down as you accumulate interest on your loan. As a rule of thumb: The higher the interest, the more interest you’ll end up paying back to your reverse mortgage provider, and the less equity you’ll have at the end once you reimburse the amount. In a rising interest rate environment, it’s not uncommon that the interest can accumulate and take up more home equity to a point where you may have no money left.
3. If you have an existing mortgage or HELOC, the funds you receive from a reverse mortgage must first be used to pay off existing loans secured by your home. Consequently, you can’t just go and spend the money you receive however you want.
4. Staying in your home may become unfeasible at some point in retirement if things like climbing the stairs, house maintenance, snow removal and lawn care become too much of a burden. In this case, you may decide to move and sell your house. The issue here is that when you do so, you must repay the reverse mortgage in full. However, you may not have sufficient funds to do so. In this case, planning is everything.
5. If a reverse mortgage has significantly reduced the equity of your home, there may be little funding left to cover long-term care later in life.
6. A reverse mortgage reduces the size of your estate. In turn, the inheritance that you would leave for your family is smaller. It’s important to consider how a reverse mortgage can impact your legacy.

Some retirees may want to remain in their home for personal or sentimental reasons. If no other financial options allow for this preference, a reverse mortgage may be the only option. However, as with any financial product, there are many things to consider; there is no one-size-fits-all solution. Reverse mortgages certainly fulfill a need in the market, but they are not well-suited for all retirees. It’s essential to get a professional opinion on your personal situation.

Please note we do not offer reverse mortgages. However, we suggest you give us a call at (514) 934-0586 (Montreal) or (403) 228-0949 to discuss comparable options. A Rothenberg Wealth Management advisor will evaluate your unique situation and see if other options are available that might be better suited to your needs.

This material is distributed for informational purposes only and should not be construed as financial or investment advice. Reference to any particular security, strategy, investment or entity does not constitute an endorsement or recommendation by Rothenberg Capital Management. While the material has been carefully checked, we cannot and do not guarantee that the information provided is correct, accurate or current. Please speak to your Rothenberg Wealth Management advisor for advice based on your unique circumstances. Rothenberg Capital Management is a member of IIROC and the Canadian Investor Protection Fund.