Which Comes First – RRSP, TFSA, Mortgage, Other

March 2019

Where should you save your money? From a TFSA versus RRSP versus Mortgage/Debt repayment choices, consider the following (and review them with your professional advisor). A RESP or RDSP are also choices.  These are just a few of many considerations.

1. Paying off your debt is a 100% guaranteed rate of return. If you have a 5% personal loan, and your tax rate is 36%, paying off that loan is like making 8% on a guaranteed investment at the bank. (After you earn 8%, you pay 36% tax (~3%), leaving you with the 5% you need to pay to the mortgage company.) If you are investing elsewhere, can you beat your –before-tax mortgage rate. To calculate your rate, divide your loan rate by 1.0 minus your “marginal tax rate,” which is the combined federal and provincial rate of tax applicable to your individual tax bracket.
2. Buying a RRSP will reduce your taxable income, and consequently also reduce your taxes based on your “marginal tax rate.” However, this is temporary, as when you withdraw the money form your RRSP in the future, all of the money withdrawn (or the balance on death) will be included in your taxable income (unless bequeathed to your spouse). Therefore, ensure you invest any RRSP refund received for paying taxes in the future. If you will be in a higher tax bracket in the future, investing in an RRSP may cost you money; if in a lower bracket, it will save you money. If you will be in the same tax bracket, the benefit is the extra money made from tax-free compounding while the money is held in the RRSP.
3. Buying a RRSP will reduce your income used to calculate your Canada Child Benefit. Above a certain threshold (2018 – about $31,000 of family income), the CCB will be reduced.
4. Buying a RRSP will reduce your income used to calculate your Guaranteed Income Supplement. However, deposits to an RRSP will eventually need to be removed, which will then decrease your supplement.
5. RRSP withdrawals will increase income for Old Age Security Clawback, so consider planning to minimize this impact if it will be applicable (net income of over approximately $76,000 in 2018). You may consider withdrawing money before age 65, in periodic lump sums, or delaying as long as possible.
6. A TFSA withdrawal is tax-free, and may be appropriate for saving before use on an RRSP when:
   1. The need for cash will be in the near future, for marriage, child rearing, education savings, purchase of a house, etc.
   2. For maintaining your emergency fund of 3 to 6 months of living expenses
   3. When you are in the lowest tax bracket, or when your tax bracket in retirement will be the same as it is now
   4. As a senior, you expect to have a low income and be able to receive the Guaranteed Income Supplement in the future, or you have a high income and may be subject to the Old Age Security Clawback
7. A Registered Education Savings Plan for your children / grandchildren may be preferred before other savings plans because of the government grants received, and because there will likely be little or no taxes paid when the child uses this money for post-secondary education.  If you do the math, and are confident in your children’s post-secondary attendance, this option may exceed the returns from your RRSP.  Just be sure to move any equity investments to safer territory when your child is 10 – 12 years old so that the money is protected from market declines just as they graduate from high school!
8. For anyone with a disability, a Registered Disability Savings Plan may be very beneficial before other savings plans because of the significant government grants received and you or the personal withdrawing the money in the future may have low or no taxes to pay on the income. Check out the impact of future withdrawals on other government disability support programs.
9. Buying an RRSP (if it will make you money in the long-term) with part of your money, and also paying down your debts with part of your money will accomplish several goals. You will develop a habit of savings, and you will be accelerating your debt reduction. Your goal should be to have all debt paid off by retirement, and your RRSP will be there as an additional emergency fund and as a source of retirement income.

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Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum