Mortgage prepayment VS RSP contribution VS RESP - What are you doing ?
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Posts: 2873
Location: Western Hemisphere
Posted on: 30-06-10 10:58:51
Location: Western Hemisphere
Posted on: 30-06-10 10:58:51
Quote:
Originally posted by Desi # 1
You should not prepay your mortgage when interest rates are lower. In past 3 years, people who were on variable rates have gained. Why do you want to pay a loan which is at much lower rate than market.
Well, it's not at all about what the interest rates are. For me, if I can payoff my mortgage as soon as I practically can while not sacrificing other investment venues, why not? That's one less debt I would have to carry. I am looking at my own personal preference.
If one wants to look at from monetary terms and how to time things and how they view their home (as a home or investment), then their preferences might be different.
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Dimple2001
Quote:RRSP drawdown or RRIF withdrawals do not reduce the amount of pension income (at least in standard DBP plans like CPP). It does reduce OAS after a certain point.
Originally posted by hchheda
His logic is RRSP contribution will reduce the amount of pension and OAS he gets in future and still be taxable.
Quote:Oh yes, they do.
Instead, any amounts you liquidate from your assets in future are not considered income, do not effect your pension/OAS from govt.
Any asset that you "liquidate" will attract capital gains taxes.
Granted, capital gains are taxed less than regular income from RRIF or RRSP withdrawal, but it is still a tax and will affect OAS (not pension).
Quote:I am not sure either.
I am not sure about his logic
Possibly, your friend is either not aware of the taxation rules or has assets socked away offshore that he plans to draw from without notifying the tax authorities.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Quote:
Originally posted by kabutar12
Hi Guys,
Please advise and if possible share your financial plan for these three Goals:
Becoming Debt free by paying Mortgage
VS
Saving big nest EGG for retirement
I have seen a number of articles around this question, esp in February. What I do not understand is why can't both the things be done at the same time?
- Maximise your mortgage payments until you do not get penalised for excess payment
- Depending upon your income, you can make biweekly contribution to RRSP plan
- Borrow money to maximise your RRSP contribution in last week of Feb. File your taxes in early March. Repay the loan with your refund. The interest you pay in loan is much less than the total interest you will accumulate along the course of your investment
Quote:This is a BS strategy, created by the banking industry to grab more and more of your money.
Originally posted by meghal
- Borrow money to maximise your RRSP contribution in last week of Feb. File your taxes in early March. Repay the loan with your refund. The interest you pay in loan is much less than the total interest you will accumulate along the course of your investment
It is basically an urban myth.
By getting people to believe this urban myth, they make money in three different ways - first loaning you money and charging higher interest; secondly by getting you to invest the money they loaned you in the first place, into their products like GIC, mutual funds, savings accounts, etc.
Even if you don't invest with that particular bank, the money circulates within the system and all banks benefit mutually.
Thirdly, this ensures that you take maximum possible time to pay your mortgage, which is your biggest debt, and thus they can get maximum interest out of you.
The tax "refund" that you get is a red herring - it is merely deferred taxes.
The Govt. will eventually recover the tax refund (or more!) once the RRSP is collapsed or converted into an income stream (RRIF).
So to calculate this correctly, you must account for the future taxes you project to pay on this amount, the growth of the investment, and the interest cost you will bear now to do all this move.
I'd suspect in the majority of cases, it is not worthwhile to do this song and dance.
Edited to add: it is better to adjust your tax withholding at the start of the year if you know you will be making RRSP contributions that year and how much you plan to make.
That way, there is no need for loan, no tax "refund" and no issue of what to do with the refund.
Having higher tax witholding during the year and then receiving a refund next year doesn't save you any money.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Quote:
Originally posted by pratickm
So to calculate this correctly, you must account for the future taxes you project to pay on this amount, the growth of the investment, and the interest cost you will bear now to do all this move.
I'd suspect in the majority of cases, it is not worthwhile to do this song and dance.
I agree with your points. However
- There is a limit as to what portion of mortgage you can repay every year. You can maximise your regular payment, which will also bring down your amortisation period
- The only time you can put a major chunk in your mortage is when you renew one. Unless there is some other way to pay your mortgage faster which I am unaware of.
- If you do not invest in RRSP, you get less refund (=you pay more in tax). So RRSP contribution is way to minimise your tax. Unless you have RRSP scheme with your employer in which case, your paystub will show the refund you get for that RRSP contribution
- I believe that when you convert from RRSP to RRIF, you might fall into low income bracket and hence might be taxed at low rate
- As I mentioned, the time period between you borrowing the money for RRSP and its repayment should be very low.
I am not a person of finance and what I am writing is just a layman's viewpoint
Quote:
'd suspect in the majority of cases, it is not worthwhile to do this song and dance.
You mean to say that one should stop contributing to RRSP because ultimately you are going to taxed anyway?
I doubt there is a safe investment option where the growth rate outpaces the inflation, unless you have the knowledge and are willing to risk your money ina stock market.
Quote:The only way to do that is to get an open variable mortgage.
Originally posted by meghal
- There is a limit as to what portion of mortgage you can repay every year. You can maximise your regular payment, which will also bring down your amortisation period
- The only time you can put a major chunk in your mortage is when you renew one. Unless there is some other way to pay your mortgage faster which I am unaware of.
Then you can pay whatever extra you want, whenever you want.
You can still go fixed but ask for the maximum pre-payment priviledges that you expect, like 20%.
Quote:Don't think from the refund perspective.
- If you do not invest in RRSP, you get less refund (=you pay more in tax). So RRSP contribution is way to minimise your tax.
The "refund" doesn't exist.
Think of it as a ghost
The only benefit of the RRSP is the tax free growth of your contributions, not the refund.
If you assume that the marginal tax rate during withdrawal (or income generated from RRIF) is close to marginal tax rate during contribution, the "refund" amount and its growth will essentially be taxed away.
Also, if you adjust your tax witholding at the start of the year to account for the amount of RRSP contribution you plan to make, the "refund" disappears.
Therefore, it should not be a factor in your calculations.
Having higher taxes witheld during the year and getting a refund next year is like loaning money to the Govt. for 1 year at 0% return
Quote:Sure, but you can't assume that today.
- I believe that when you convert from RRSP to RRIF, you might fall into low income bracket and hence might be taxed at low rate
If you have many years left until retirement, you have no way of knowing what your marginal tax rate will be after retirement.
For all you know, in 30 years or so, the tax rates may be double of what they are today.
Quote:Nope, I didn't say that.
You mean to say that one should stop contributing to RRSP because ultimately you are going to taxed anyway?
What I said was that any tax refund you may receive should not be involved in any calculations and whatever you do with the refund (like making payment towards your mortgage) does not really save you anything.
Don't do RRSP because of the refund.
RRSP still has value because of tax-free growth of your contributions (original after-tax capital or principal).
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Quote:ashedfc, in your opinion, is this time appropriate to buy into RRBs?
Originally posted by ashedfc
If your sole objective is to beat inflation, than RRB is the ideal way. Real return bonds will keep pace with inflation. The most cost effective way to deal in RRB is through an RRRB Fund where you can have a minimum of as low as $50 per month.
It seems that the market is pricing in deflation instead of inflation.
The yield curve is flat for the long run.
As you know, RRBs will be a losing game in the case of deflation or minimal inflation.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
