RRSP, RESP, TFSA or Mortgage prepayment… Which offers the best bang for my buck?

Trying to decide what’s the best move can be difficult… and, I must admit, this isn’t an easy subject to tackle. There are so many opinions! But it’s important enough that I’m going to put my two cents into the discussion. (My final recommendations are listed at the bottom if you want to fast forward.)

First, let’s come to the understanding that we’re all different and have unique needs. You must first ask for professional advice in order to make up your own mind. Having said that, I think that, for me, this is actually a very easy decision.

RESP – If you have kids, put money into a Registered Education Savings Plan. The government gives you 20% on a max contribution of $2,500/year per child. That’s $500 in free money! Just be careful not to invest in any risky funds or stocks.

TFSA – If you have some extra cash then, yes, put those funds into a Tax-Free Savings Account. You can contribute $5,000/year and any unused contribution limit carries forward each year. And the good news is… whatever investments are allowed for RRSPs are also allowed for TFSA. Funds can go in, come out and grow tax-free. But I wouldn’t be putting too much in here while you still have a mortgage… pay your mortgage off first.

RRSP – An old favourite for many. Millions of Canadians have contributed to RRSPs in an attempt to be masters of their future and retirement. Mutual Funds have become a favourite investment within RRSPs. But, now, let me ask you… how has your RRSP performed? For most of us, that answer comes with some profanities…%@!)*&%!!! or something along those lines.

RRSP contributions are tax-deductible… and higher income earners will benefit more. Your funds can grow, tax-free, but you must pay taxes when you withdraw the funds. At age 71, you have 3 options: 1) Transfer to a Registered Retirement Income Fund; 2) Buy a life annuity (better when interest rates are high); or 3) Take the cash (bad choice as you’ll have to include those funds as income in one tax year, which will result in a large tax bill).

RRSPs are a way to grow your investments, tax-free, and defer paying the tax… but you’ll have to pay the tax, make no mistake about that.

MORTGAGE PREPAYMENT – Probably the least exciting option, but the best choice for many. Just pay down your mortgage. Your mortgage is not tax-deductible, unless you have a mortgage on an investment or rental property. Get rid of that mortgage faster by making prepayments. Every little bit helps when contributed on a regular basis over time.

On a $300,000 mortgage, a $3,000 annual prepayment will shorten your amortization from 25 years to 20 years, 10 months. Based on a 3.29% mortgage rate, that’s a savings of more than $28,000. Hey, a $28,000 return on a $45,000 investment isn’t bad.

ONE MORE OPTION… INVEST IN REAL ESTATE – Sure, we’ve all seen property values go up over the past few years… and we’re currently experiencing a correction. But if you buy a rental property, you should plan to hold it for the long-term – at least seven years. That’s usually enough time for any price correction to work itself out. Rental properties are popular today because mortgage rates are low and vacancy rates are even lower.

Another way to invest in real estate is through private mortgages. Private mortgage rates run from 10% to 15%. It takes a little more knowledge and experience to understand this investment, but it could be worthwhile. Just be careful to get as much information as possible before making any second mortgage investment decisions. These are RRSP eligible too!

FINAL DECISIONS – For me, RRSPs just haven’t performed well. And maybe I haven’t invested wisely. One thing is certain: my Investment Advisors and Fund Managers all won, since they take their cut off the top.

Not all Investment Advisors are alike, but I seemed to have hooked up with those who talked a better game than they could deliver. Here’s a question: were you ever put into a Deferred Sales Charge (DSC) mutual fund? You know, the funds where you can’t exit the fund family for five or six years without paying a hefty penalty? I know several friends and clients who got pushed into those funds. Not one of them is happy. So, I’m staying away from these funds.

In case you can’t tell, I’ve lost my faith in mutual funds and decided to manage my own money, And, guess what? I’ve done better than any advisor I know! I’m sure there are good advisors out there, but I’ve decided that no one will care more about my money and future than I do.

It’s time to take charge of our money! Here are my suggestions:

1. Put money into an RESP if you have kids. This is a no-brainer. Be sure to park that money in a safe, low-risk investment. Remember, you already made 20% thanks to the government’s contribution, so let’s not get greedy.
2. Pay off your mortgage. Make lumpsum prepayments. Every bit helps… and try to increase your regular payments. This will accelerate the time it takes to pay off your mortgage.
3. If you have to invest in stocks or funds, then put this into a TFSA.
4. Invest in real estate. It’s not overly exciting or sexy, but history tells us it’s a solid long-term investment option.
5. RRSPs are last on my list. I’m just not a fan. If you have other cash, why not invest it elsewhere? But, if you have to put money into RRSPs, play it safe. This is your future… your retirement, so don’t gamble.
6. Seek professional advice. If you’re not sure what to do, get some advice. Feel free to contact me. If I can’t answer your questions, I’ll direct you to someone who can.

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca