Dave Schurman of FirstOntario Credit Union was here for another edition of Finance Friday! This morning Dave answered viewer questions on a range of personal finance topics.
“Dave, I’m 61 and have RRSP’S. A friend suggested to start withdrawing $5000 a year now, because it’s only taxed at 10%, which is $500, & put the $4500 into a TFSA. This is better than paying a higher rate of tax later when withdrawals come from a RRIF. Is this sound advice? Thank you”.
Schurman says Susan’s friend’s advice is flawed because the 10 per cent tax that the friend is referring to on an RRSP withdrawal is called a ‘withholding tax.” This is not the actual tax you are going to have to pay on that RRSP, it’s only a sort of down payment that your financial institution, by law, takes off that withdrawal and forward to the CRA. The actual amount of tax you’re going to have to pay depends on your taxable income for the year.
Schurman says, as an example, if Susan’s taxable income is $50,000 from work and any other income sources, in Ontario that is a 30 per cent combined tax rate. So, on the $5,000 withdrawal, 30 per cent of $5,000 is $1,500 in tax Susan would owe on that withdrawal, not $500.
“Hi Dave. I’m 50 and have a mortgage. What’s financially more beneficial, to pay down the allowable lump sum on my mortgage, or to contribute the lump sum to my RRSP?”
Schurman says there is pros and cons for both and that it’s a good problem to have the choice. He says it is never a bad idea to pay off debt on your mortgage because it reduces your principal and reduces the interest you have to pay on that principal. However, he says it is more beneficial to pay down a lump sum in he early years of a mortgage.
When it comes to an RRSP, Schurman says there is the beauty of compound interest involved in choosing this route. He suggest having a rule of thumb: can you make a higher return on an RRSP investment than the interest rate you’re paying on your mortgage?
He recommends compromising and doing both. Make an RRSP contribution and use tax refund to put a lump sum on your mortgage as well.
“As a millennial living in Hamilton, homeownership has become increasingly out of reach for my generation. Would it be more savvy for millennials who’ve given up the homeownership dream to invest in an RRSP instead of saving for a down payment? Or would a TFSA be better to save for retirement? Thanks Dave!
Schurman says an RRSP is much better to save for retirement than a TFSA. RRSP gets the tax refund, which is the big kicker. You can also recontribute tax refund into a TFSA (or back into your RRSP).
He recommends not giving up on home ownership. Some creative ways to make it work include renting out a portion of your home once you buy it, or starts with a condo or home out of town where prices are cheaper. Build equity as mortgage is paid down and the home alue goes up, then move up. He says you can us money out of your RRSP tax free for a down payment on a home under the New Homeowner’s Plan and repay it to the RRSP over 15 years.