RRSPs
are the best tax-saving method available to the average taxpayer in
Canada.
We will assume:
You have a $100,000
mortgage.
The interest is not tax
deductible.
Your
interest rate is 7.5%.
Your monthly payment amount and the total
interest paid will vary greatly depending on how long you take to pay off
your mortgage.
The following table shows that you can save
almost $80,000 by paying off a $100,000 mortgage over 10 years instead of 25
years:
Mortgage
Term
(years)
Monthly Mortgage
Payment
@7.5% Interest
Total Mortgage
Payments
Total
Interest Paid
Amount Saved
Using
Shorter
Term
25
$ 739
$ 221,697
$ 121,697
$
0
20
$ 806
$ 193,342
$ 93,342
$ 28,355
15
$ 927
$ 166,862
$ 66,862
$ 54,835
10
$ 1,187
$ 142,442
$ 42,442
$ 79,255
Tax tip: Pay
down all non-tax-deductible debt with over 8% interest, then
see our Save and Invest
page.
Use the above example, and assume that
your marginal tax
rate (the rate of tax you will pay on the next dollar you
earn) is 30%.
You make total payments of $221,697
over 25 years. Assume you pay off your mortgage over a shorter
period, and invest the savings in RRSPs during the balance of the 25
years. You also invest the tax savings in your RRSP.
Your total out-of-pocket cost over 25 years will be the same in all 4
scenarios below. The savings invested monthly = amount saved using
shorter term mortgage divided by # of months investing in RRSPs.
Note: When you withdraw funds from your
RRSP the amount withdrawn will be taxed as income at your marginal tax
rate. Theoretically, this will be when you are not earning employment
income, so you will be in a lower tax bracket.
$100,000 mortgage
@7.5%
term & monthly payments
Amount Saved
Using Shorter
Term @7.5%
mtg rate
Savings invested
monthly after
mortgage
paid off
Monthly tax
savings
reinvested
in RRSPs
Total
out-of-pocket
expenses over
25 years
Total in RRSPs
at end of
25 Years
@5% return
Total in RRSPs
at
end of
25 Years
@10% return
25 yrs @$738.99
$
0
0
$ 0
$221,697
$
0
$
0
20 yrs @$805.59
$ 28,355
5 yrs @$472.58
5 yrs @$142
$221,697
$ 40,752
$ 45,025
15 yrs @$927.01
$ 54,835
10 yrs @$456.96
10 yrs @$137
$221,697
$ 89,649
$ 113,594
10 yrs @$1,187.02
$ 79,255
15 yrs @$440.31
15 yrs @$132
$221,697
$ 148,195
$ 218,203
By paying off your mortgage
in 10 years and investing the savings in RRSPs after the
mortgage is paid off, even though you have used the
same amount of money over the 25
years, you are ahead by $148,195 at a 5% RRSP return, and by $218,203 at a 10%
return.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
See our Business
Directory for tax, accounting and finance-related firms in your
area.
Please see our legal
disclaimer.
