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Is it a good idea to use my RRSP funds to pay off the mortgage and then deposit the mortgage payment back into the RRSP once it is paid off? What are the advantages and disadvantages of this mortgage-free loan strategy?
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Pay off your mortgage or continue investing with your RRSP?
Paying off your mortgage with a Registered Retirement Savings Plan (RRSP) and then putting the mortgage amount back into the RRSP may not be a good strategy for a number of reasons.
- If you withdraw any funds from an RRSP, the funds will be taxed as income. Withholding tax is required on the initial withdrawal, but the total tax amount depends on your other sources of income in the year you file your return.
- If you withdraw from an RRSP, you will not regain your original RRSP contribution room, and you may not be able to put the same amount back into your RRSP unless you currently have sufficient room. This means you’ll be giving up years of compounding returns on the money you withdraw, and never be able to make up for it. This differs from a TFSA, where withdrawal amounts are added back to your contribution room the following year.
- The return you receive in your RRSP may be greater than the interest you pay on your mortgage. If this is the case, then it makes sense to continue paying your mortgage while getting a higher return on your savings.
- It’s better to withdraw from an RRSP when your income is lower and to make contributions when your income is higher. Depending on your current income, the timing may not be the best, and withdrawing RRSP funds may put you in OAS clawback territory if you are receiving Old Age Security benefits. This could lead to tax rates for high-income Quebecers exceeding 50% in 2023, or even as high as 62%.
A better strategy for paying down your mortgage is to accelerate your repayments with an additional, affordable amount that is applied directly to the principal. This has the effect of shortening the amortization period, even if it means reducing or forgoing RRSP contributions. Contact your mortgage lender or use a mortgage calculator to estimate the results of an accelerated additional payment in your particular situation.
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Should I cash out my RRSP to pay off my mortgage? appeared first on MoneySense.
