x

- PAY DOWN the mortgage or
contribute to an RRSP? As
the registered retirement sav-
ings plan season moves into
high gear, you hear this ques-
tion more frequently.

“And when I put on seminars for
my group RRSP clients, that’s one
of the most popular discussion top-
ics.” Carl Spiess, an investment
executive with ScotiaMeLeod luc..
said in an interview, .

“Baby-bcomers, for example.
have started to get their mortgages
down to the point where they are
choosing between further debi
reduction or an RRSP contribution.

“Initially, when their morigages
were so large, they felt they had no
‘choice. There was too much fear of
all the debt and they felt paying
down the mortgage had to come
before the RRSP.”

ortgage or

Spiess said while you can run
the mortgage versus RRSP compar-
ison on a computer. “what you
decide depends atoton the kind ef
Person you are.

“Ifyou really hate debt, it will
make you feel better to pay off the
mortgage. But if you are trying to
increase your net worth as much as
you can aid as soon as possible.
you'll probably go for the RRSP.”

Here are examples of the (wo
approaches —— although different
mortgage rates, investment yields,
amounts saved, Hix rules. etc. will
dramatically alter the results and
conclusions.

M MORTGAGE PAYDOWN:
Let's say you increase your month-
ly payment by $133.50 ta get rid at
a $100,000 7% mortgage in 17
instead of 25-years.

Put your former $834 morahly
payment into an RRSP and invest
both the tax saved outside lhe
RRSP and the money in the plan at
6% over the next eight years. That
will give you perhaps $38,000 non-
RRSP and $105,000 RRSP funds.

If you are allowed to contribute
only $5,000 a year to your RRSP
but still save the other $5,000,
you'll have $66,000 outside the
RRSP and $52,000 inside.

& RRSP FIRST: Stay with the 25-
year mortgage and'contribute the
difference between the 17-year and
25-year payments —- 31,600 a year
—toan RRSP. At the sarne 6%,
that will build up over 25 years to
about $26,000 non-RRSP and
$93,600 RRSP funds.

In both cases, you pay tax on
your non-RRSP income as you go
along. And you'll pay tax on the
RRSP funds upon withdrawal.

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Spiess said older people night
consider paving off their mortgage
provided they then invest the for-
mer payment nather than spending
the money.

People who are more than 30
years away from retirement might
be better aff to make RRSP contri-
butions becittse the tax-shettered
compounding can produce so much
investment growth over such along
periad,

As @ compromise —- especially
as it's cough to predict investimeni
growl cand tax rules — Spiess sug-
gests you consider the strategy that
provedes the best of both worlds. a
recommendation f support unless
you can see one approach is clearly
better fn your situation,

Male your maximum RRSP
contribt-ion each year, Keep track

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of the tax you save and thea put that
Money against the mortwaye.
Ideally. have less income tax with-
held during the year instead of
applying for the refund produced by
the RRSP contribution when you
fe vour return. Then use this
“raise” lo increase your weekly or
monthly morigaze payment

However. Spiess said. uf you tect
you might lose your job during
these Uncertin nies vou should
probably go the RRSP route te pro-
vide liquidity rather than paying off
the mortgage taster and tying up
your money in your hame.

Lets say you have a $150,000
mortgage and are able to save
$7,000 3 year. 1 you par that
Woney deans He mortaage and
suddenly find voursel? out of work,
you might have a hard time con-

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vincing the financial institution to
increase your Mortgage again or
otherwise lend you money to meet
your living expenses,

On the other hand, said Spiess, if
you evatribute that $7,000 a year to
an RRSP, that could sive you close
to $3,000 a year in tax, fo provide it
cash reserve. “Youll also have the
money you've built up in the RRSP
to dri on if necessary and
you save on the tax siice yout
be ina lower lax bracket when
you're out of work,” he said.

Mike Greaby is a North Share-
hased caluamist and independent
financial adviser wha works with
individuals; he will answer your
questions iu this columu as space
allows -—- write to him clo die North
Shore News, 1139 Lonsdale Ave.,
North Vancouver V7M 2444,

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