[et_pb_section fb_built=”1″ theme_builder_area=”post_content” _builder_version=”4.21.0″ _module_preset=”default”][et_pb_row _builder_version=”4.21.0″ _module_preset=”default” theme_builder_area=”post_content”][et_pb_column _builder_version=”4.21.0″ _module_preset=”default” type=”4_4″ theme_builder_area=”post_content”][et_pb_image src=”https:\/\/financialadvise.ca\/wp-content\/uploads\/2023\/06\/Untitled-design.jpg” _builder_version=”4.21.0″ _module_preset=”default” theme_builder_area=”post_content” title_text=”Untitled design” hover_enabled=”0″ sticky_enabled=”0″][\/et_pb_image][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=”4.21.0″ _module_preset=”default” theme_builder_area=”post_content”][et_pb_column _builder_version=”4.21.0″ _module_preset=”default” type=”4_4″ theme_builder_area=”post_content”][et_pb_text _builder_version=”4.21.0″ _module_preset=”default” theme_builder_area=”post_content” hover_enabled=”0″ sticky_enabled=”0″]<\/p>\n
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To make an apples-to-apples comparison, you invest $15,385 in your RRSP. To reach that amount, you borrow $5,385 from a financial institution for 2 to 3 months. You\u2019ll pay around $100 in interest, bringing your total RRSP investment to $15,385. With a 35% marginal tax rate, your RRSP refund will be $5,385, which you can use to repay the loan.<\/p>\n
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Scenario 1<\/p>\n
a)The same tax rate before and after retirement b) The interest rate on debt and the rate of return on RRSP\/TFSA investments are the same.<\/p>\n
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Fast forward 10 years,<\/p>\n
RRSP – Your $15,385 investment in the RRSP could grow to nearly $25,060. After taxes, this leaves you with $16,289.<\/p>\n
TFSA – If you had invested in a TFSA instead, the withdrawal would be tax-free, so your ending balance would be similar i.e. $16,289.<\/p>\n
Debt \u2013 A debt of $10,000 after 10 years would have a balance of the same amount of $16,289.<\/p>\n
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Who wins:<\/u><\/em><\/strong> You would have the same outcome whether you choose a TFSA, RRSP, or make a debt repayment.<\/p>\n <\/p>\n Scenario 2<\/p>\n Fast Forward 10 years<\/p>\n The RRSP balance would be $25,060 pre-tax and $18,795 after-tax.<\/p>\n TFSA balance would be $16,289<\/p>\n The mortgage balance would be $16,289.<\/p>\n Who wins: RRSP would outperform your mortgage and TFSA, making it a better option. You could invest in an RRSP and pay off the debt after 10 years and still, you would have an extra $2506.<\/p>\n <\/p>\n Scenario 3<\/p>\n a)Let\u2019s assume a 7% return on your investments, higher than the interest rate on your debt. b) The tax rates before and after retirement are the same (35%).<\/p>\n Fast Forward 10 years<\/p>\n RRSP pre-tax balance would be $30264 and after-tax $19672<\/p>\n TFSA balance would be $19,672 and there are no taxes on TFSA.<\/p>\n The mortgage balance would be $16,289<\/p>\n Who wins: Here, investing will likely yield better results than paying off the debt.<\/p>\n <\/p>\n Scenario 4<\/p>\n a)Your tax rate in retirement is 45%, compared to 35% pre-retirement. b) The interest rate is the same for debt repayment and investments.<\/p>\n <\/p>\n Fast Forward 10 years<\/p>\n <\/p>\n RRSP pre-tax balance would be $25,060 and after-tax $13,783<\/p>\n TFSA balance would be $16,289 and there are no taxes on TFSA.<\/p>\n The mortgage balance would be $16,289<\/p>\n Who wins: In this scenario, the TFSA and paying off your mortgage are better choices compared to investing in an RRSP.<\/p>\n Important: if you have high-interest debt, like credit card debt, it’s crucial to pay that off before investing. Beating a 20% annual return after taxes and fees is nearly impossible with most investments.<\/p>\n <\/p>\n Disclaimer: This is for information purposes only.<\/p>\n <\/p>\n <\/p>\n <\/p>\n [\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":" Should you pay off your mortgage or invest in a TFSA or RRSP? Your choice can shape your financial future. While emotions play a role, let’s dive into the numbers to see the impact! To make an apples-to-apples comparison, you invest $15,385 in your RRSP. To reach that amount, you borrow $5,385 […]<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[1],"tags":[],"class_list":["post-1960","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"yoast_head":"\n\n