RRSP versus TFSA Investment - Which way to go ?

So, we get a lot of questions every year asking where is the best place to put your Investment Income......

With the New TFSA, Tax Free Savings Account it only makes the question that much more difficult to answer.


The main thing is that you are putting some money aside early to have access to at a later time. Saving for that rainy day, a big Vacation, to help pay a Mortgage or to have Retirement Income when you are ready to Retire.

In Canada, you are able to put a certain amount into your RRSP each year based on your Income and get a Tax refund at the end of the year. When it comes time to Retire you are then Taxed on that money, as Income when you Retire. The Idea is that you will not have any other income when you are retired and you will be taxed a a lower Rate. So RRSP's would be the 1st place to put your money and here's why.

When you get your Refund you can use that to invest into your TFSA. Work to meet the $5,000 TFSA limit each year. That money you can withdraw later without paying any taxes on it. You can use this money to help pay for Big vacations and other things like that.

Now back to the RRSP. When you are younger you should max out your RRSP every year .... Take the refund and Max out your TFSA.  Try as hard as you can to reach  $150,000 - $200,000 in your RRSP before you buy your 1st home..... so that when it comes time to buy your house you can set up what is called an RRSP-Mortgage, where you effectively borrow the full amount of your RRSP  (from yourself) to pay off your house.

With an RRSP-Mortgage you pay back your RRSP to yourself without paying any interest to the Bank. Now many people have never heard of this since the Banks don't make any money from you, but it is the best way to go. We did this back in 2006 and have slowly been paying back our RRSP + 7.75 % Interest to ourselves. In the long run we will have saved thousands of dollars in Interest and grew our RRSP  at a rate of 7.75 % + GIC rates each year - without any Risk.

What is the best strategy to Pay off your Mortgage ? What about that RRSP ?

One of the best strategies for paying off your mortgage quickly is to increase your Mortgage Payments as well as the frequency of payments, ie: bi-weekly rather than monthly. If you can max out your Mortgage Payments and also make lump sum payments to the Mortgage (without penalties) you can pay it off in about half the time. Only problem is where do you get all that extra cash for extra payments ? Is there anywhere you have a big chunk of money just sitting there ? Well, maybe. How about that RRSP ? .... but you can't access that until you retire ?

A few years ago I went into the nearest TD Branch and asked that question. Reluctantly the Mortgage Specialist told me of a way I could access my RRSP funds to pay off my Mortgage completely, without penalty, and pay myself the Interest rather than the bank. It's called a Self-Directed RRSP-Mortgage. Since I had an amount equal to my Mortgage sitting in my RRSP (and losing money in Mutual Funds) I decided to do some research and see if this could really work. There were some costs involved. I needed a Lawyer to help me with the Discharge of the existing Mortgage and set up a new RRSP-Mortgage that I would pay back (TO MYSELF) over the next 20 years. I set the terms of this RRSP Mortgage so that I would be paying back the Principal plus 8% Interest to MYSELF, and not the bank. I was also able to reduce the monthly payments (To MYSELF) so that I would have more cash on hand. This maximizes the amount I'll have in my RRSP at the end of the 20 year Payment Term. Luckily I did this before the Market crash in 2008 and made better use of my RRSP Savings. You can learn more about this from TDCanadaTrust.ca

RRSP Deadline was March 1st. Now, how about that RRSP Mortgage ?

An RRSP Mortgage is a way for you to pay off your Mortgage completely using the funds you have in your RRSP - Registered Retirement Savings Plan. Did you know that you can access more than the $ 25 K Limit ? If you owe 100 k on your Mortgage and you have $100 k in your RRSP you can pay off your Mortgage completely, then pay yourself back + Interest. More information on the following article.

What's an RRSP Mortgage ?

As soon as your RRSP equals the amount you owe on your mortgage - you can set up what is called a Self Directed RRSP Mortgage and use the RRSP to completely pay off the mortgage.
You then set up a plan to pay back your RRSP over the next 25 years. And here is the best part - you pay interest on the RRSP Mortgage to yourself - not the bank.

For example, if you set up a 10 year RRSP mortgage ammortized over 25 years you can be paying yourself 8% interest - back into your RRSP. If you invest the monthly payments into a GIC at 4% - It's like making 12% compounded interest on your RRSP.
This type of Mortgage can only be set up through a Self-Directed Plan such as with TDWaterhouse.
There are legal fees (about $600) to discharge your current mortgage as well as CMHC Insurance on the new RRSP Mortgage.(minimal) + an annual plan fee of $200. But if you consider what you are saving on monthly interest payments to the Bank (ie:6% x $100,000 = $6,000/yr) You are way ahead.

This concept works especially well when your mortgage is over $100,000 and you have 25 years before you will need your RRSP.

Of course you "could" do better (or worse) in the Stock Market - but where can you earn 12% on a $100,000 investment without any risk. All Interest payments go to you rather than the Bank. The RRSP Mortgage is a well kept Secret. And now you know why....