For the next month, our blog focus will be the RRSP: Everyone’s favourite topic of conversation during the month of February! Why is the RRSP just a great subject for this time of the year, you ask? Well, there are several reasons, the top 3 being:
- It gives us guys something to worry about in February other than Valentine’s Day
- It’s cold outside and worrying about an RRSP is an indoor activity
- The deadline to contribute is 11:59pm on March 3rd this year…and you have to make a decision what to do with all that cash you saved on Boxing Day!
The decisions are often tricky when it comes to an RRSP since there are several things you can do with extra cash this time of year. The most common question I’m asked is: “Should I use this money to pay down my mortgage, deposit it into a TFSA or contribute to an RRSP??” The answer is always the same….it depends.
Today, I’m going to address one of these “Depends” (please try not to confuse the above-pictured adult diapers with this tax advice):
It depends on whether you have a mortgage and depends as well on the details of that mortgage!!
If you live in a house owned by a bank, you’re like me and are technically a squatter. (Congrats on that.) One day, however, hopefully in the not-too-distant-future, you’ll pay off that loan and you’ll own your home outright. (Woohoo!)Until that day comes, you’ll have to make a yearly decision – whether to pay off some of your mortgage, contribute to an RRSP or do something else with that money. (Personally, I’d use it on bowling and lots of Cadbury cream eggs). There are no set-in-stone rules when making this choice, but there are some guidelines that I like to use. Generally speaking:
- If your salary is going to increase in the next couple of years, pushing you into a higher tax bracket, don’t contribute to the RRSP. Save the RRSP room for those future years when it will be worth more!
- If your mortgage rate is really low, the interest you’ll be saving by paying down your mortgage is calculated at about the same rate as your mortgage…in other words, not so much. Other investment options might make more sense.
- If you have a need for cash in the medium-to-long-term (new Man-CaveTM in the garage??!), just keep in mind that when you contribute to an RRSP, the money is locked up until retirement age. Yes, you can withdraw it. But you’ll have wasted your RRSP room and you’ll likely be paying a nice chunk of tax on the withdrawal.
I could go on but that wouldn’t be healthy for either of us. If you want to discuss further, it means that this decision is important to your personal finances and it’s time to gather together all the information needed to make an educated choice. All the contact information you need is below (if you want my help making the choice, of course!).
For further reading on the RRSP, check out last year’s blog post on the topic (one of my first posts ever!).
The Funny Accountant
Don’t forget to follow me on Twitter if you like what you read! And as always, if you have tax questions, need advice on your personal taxes, corporate taxes or anything else accounting or business related, please contact The Funny Accountant/President of MK & Associates by phone at (514) 833-1158 or by e-mail at firstname.lastname@example.org.
Also, for a witty and insightful read, check out the wifey’s blog. It’s funny and good.