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Orginally posted by chandresh
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Third Opinion:
Toronto real estate lawyer Bob Aaron took at look at almost 200 Canadian websites to get opinions on the matter, and he concluded that many of the sites had misleading or incorrect information. Most are sponsored by companies that earn commissions on RRSP contributions, while no one earns a fee when a homeowner pays down his mortgage.
How correct!
Chandresh
Chandreshiji,
I work for a financial institution....we encourage our customers to invest is RRSPs based on their individual situations....in any case we DO NOT get any commission on RRSP contributions made by our customers....I wouldn't know for sure but it's some private companies who market RRSP loans with a condition of investing in their own M Funds who give commisions to their sales persons....
IMHO....if investment time horizons are over 10-15 yrs....the couple is in early 30s or mid 30s....and have steady income......it's better to invest in RRSP...use refund to pay down your mortgage....as the refund is net profit.....and on an average over a long term period one's investment can generate a return of 7-10 % without taking major risks like stock mkt....as there are very many good M funds.....chances of someone incurring losses in those investments are slim to none....another advantage is that your income is also tax sheltered under registered plan so the compounding effect is even better.....
If one chooses the 2nd option of paying down the mortgage prior to investing in RRSPs...then the investment time horizon is also lesser and the return of investment is likely to be less as you may choose to invest in GICs only....as with shorter time horizon M funds investment is more volatile and risky...with a mild chance of incurring losses.....but if one was to hold on to the same M fund for a longer time....he/she will see investment graph going northbound (in majority of the cases...no guarantee)
again just my opinion....but one thing is for sure....no sales person gets commissions for RRSP contributions.....that's a complete misconception....atleast not the major bank sales people
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Let's help each other to grow & prosper in Canada
I found this on a financial blog I frequent.
Investing Inside an RRSP vs. Outside an RRSP
There were a couple of blog articles recently about investing inside an RRSP vs. investing outside an RRSP. Frugal Focus discusses a report by Phillips, Hagar & North called “The Retirement Savings Debate: Inside or outside the RRSP structure.” He makes note of the fact that
the publication of this report preceeds two potentially important events - the November 2005 announcment by the former Liberal government regarding changes to taxation for dividend income and the yet-unrealized election promise by the new Conservative government to allow capital gains to be eliminated for individuals on the sale of assets when the proceeds are reinvested within six months
The Canadian Capitalist orginally blogged about this and focused on an article by Derek Foster (author of “Stop Working”) in Canadian MoneySaver magazine that discussed ways of investing outside your RRSP. Foster has some interesting ideas, like this one:
Suppose you were planning to put $6,000/year into an RRSP to save for your retirement. You would be contributing to your RRSP and getting a portion of that back because you could use the RRSP contribution as a deduction. Thus, your out-of-pocket annual expense would be $6,000, less the amount of tax money you have refunded.
Another method of achieving the same result is to take out a secured line of credit (let’s say $100,000 and invest it in good quality, blue chip, dividend-paying equities. Now you’ll be paying the $6,000 towards interest instead of putting it into an RRSP, but you will still get the same deduction as your out-of-pocket expenses are exactly the same! Money borrowed to invest is tax deductible. The only difference is that now you have $100,000 invested in a non-registered account that holds dividend-paying stocks rather than a contribution of $6,000 every year in your RRSP. You get the benefit of the dividend tax credit, while still getting a full deduction on the $6,000 interest payment (exactly the same effect as contributing to an RRSP).
The Canadian Capitalist has a good argument for why leveraging may not work. The Phillips, Hager & North report mentions leveraging as one of the purported advantages of investing outside of an RRSP, although they mention that “borrowing money to invest in a non-registered accoutn has risks that are not addressed. . . ”
I strongly recommend reading the Phillips, Hager & North article. It is only 7 pages of easy-to-read material. Here is the conclusion though, for those with little time on their hands:
Our analysis shows that saving for retirement using a registered plan (RRSP) is more beneficial than saving in a non-registered, taxable account. There are a few exceptions to this, but for the most part, this conclusion will hold true for the majority of middle- and upperincome earners.
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I have only 2 cents to contribute, not a cent more, not a cent less ;-)
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Originally posted by chandresh
One thing I have not been able to understand is why would/should a person who has a mortage liability invest in RRSP? While RRSP would give ONE TIME tax benefit to a person depending on their marginal rate of interest (anywhere between 23 and say 45), that money not utilised for payment of mortgage would result in a compounding interest burden for balance of mortgage period.
If I have a mortgage of 250k and a yearly RRSP limit of 10k, wouldn't it be better to use that money (in addition to the regular mortgage payments) to repay the mortgage and reduce principal and therefore be debt free sooner, which in turn would also save a huge amount in interest payment (at today's rate an average of 4.5% per year for balance period of mortgage)? RRSP contribution limit on the other hand never expires and keeps growing, so can be used anytime. And in general, a person's income 10 years hense would be larger than today, so therefore the marginal rate of tax would be higher 10 years hense, than today, so the RRSP limit utilisation 10 years later would give a larger tax benefit.
Is my thinking wrong somewhere?
Chandresh
Arey, u can enjoy both paying down mortgage and building RRSP at same time- Yeh hai Smith Manoeuvre ki koobhi.
Also if u r over 41, it is paying not to invest in RRSP but in non-reg investments.
lakin hum kaun hota hai bolne wala, please to consult with long-time financial advisor, not naya banda.
Apun doing both.Ek bajoo se mortgage kam horela hai(already paying down more than 20% on mortgage when starting with 5% down -2 years ago and will pay 25% by next week- then can do plain Smith manoeuvre instead of guerilla version apun engaged in now) aur dusra bajoo se RRSP jama horela hai aur kya non-reg investments bhi.
Sab leverage ki khoobi.
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hinglish zindabad
Another thing- there is the LSIF where over and above the normal RRSP saving aur 30% getting from Provincial and federal gorement.
last the year, apun putting into one fund ROI, getting the 30% more and the fund only growing 6%. lakin again this the year apun putting in ROI again and getting the 30% more- so there are hazaar factors to take into account when doing calc if RRSP yaan paying down mortgage. So do both nahin to pagal banning and as one the person tolding put refund into mortgage, vagara, vagara.
As Pramod tolding, depending on one's tax bracket, earnings, investments, ghanta, fanta...
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hinglish zindabad
Location: God's own country
Posted on: 03-04-06 13:38:44
Remeber that if you want to put in the ROI fund / LSIF sponsered by Govt. of Ontario and getting 30% tax deduction on the money invested, it has a lock in period of 8 years.
and remeber that either this or the next year is the last year that the govt. of ontario will give such concession. (meaning that the provincial 30% deduction is going to be scrapped either next year or the year after that.
Financial guru's, please explain more. i am illitrate in terms of financial advice.
My standard disclaimer will be in effect for this post. Contact me if you donot understand my disclaimer.
TK
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I am a Gents and not a Ladies.
As far as apun knowing, it is go for another five the years, to be trimmed down slowly.
Lakin kal ka kya matlab? Apun tolding apun already doing and getting 30% upfront to enjoy. Lock in hai 8 saal ke liye so kya? Last year apun putting 5000 and this year 5000 matlab only 10000 locked up to kya? Doosre to locked up nahin na?
Chal all the depending upon your situations.
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hinglish zindabad
