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RRSPs RRIFs and TFSAs -> RRSPs Save Income Tax

RRSPs: Best Tax Saving Method for Average Canadian Taxpayer

We will assume:

bulletYou have a $100,000 mortgage.
bulletThe interest is not tax deductible.
bulletYour 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:

Monthly Mortgage
@7.5% Interest
Total Mortgage
Interest Paid
Amount Saved
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Note:  When you withdraw funds from your RRSP the amount withdrawn will be taxed as income at your marginal tax rate.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
paid off
Monthly tax
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. 

To calculate savings from an RRSP contribution, see the Canadian Tax Calculator.

Try our Annual Income Calculator to see what annual income will be provided by your investments.

Try one of the loan calculators on the Calculators page, to see how much interest you can save by paying down your debt more quickly!

See also:  What is better - TFSA or RRSP?

Revised: October 26, 2023


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