Comments on: RRSP Contribution VS Lump Sum Payment on Mortgage II: Answering a reader’s question http://www.thefinancialblogger.com/134/ This is where your finance takes place Wed, 08 Feb 2012 22:20:58 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Ayashah http://www.thefinancialblogger.com/134/comment-page-1/#comment-17183 Ayashah Wed, 09 Mar 2011 21:22:20 +0000 http://www.thefinancialblogger.com/134/#comment-17183 Or what happens if you take that $4000 return and either invest it or pay down your mortgage. Or what happens if you take that $4000 return and either invest it or pay down your mortgage.

]]> By: Mark http://www.thefinancialblogger.com/134/comment-page-1/#comment-15306 Mark Mon, 29 Nov 2010 05:17:45 +0000 http://www.thefinancialblogger.com/134/#comment-15306 One thing to consider is that this is only effective if you are applying for a new mortgage or up for renewal. If you have an existing mortgage, paying down $10,000 will not affect your monthly payments, just shorten the length of the mortgage. You may want to run the numbers for the senario where you invest in the RRSP, then apply the refund to the existing mortgage. One thing to consider is that this is only effective if you are applying for a new mortgage or up for renewal. If you have an existing mortgage, paying down $10,000 will not affect your monthly payments, just shorten the length of the mortgage.

You may want to run the numbers for the senario where you invest in the RRSP, then apply the refund to the existing mortgage.

]]> By: The Financial Blogger http://www.thefinancialblogger.com/134/comment-page-1/#comment-379 The Financial Blogger Tue, 28 Aug 2007 11:29:12 +0000 http://www.thefinancialblogger.com/134/#comment-379 911, I Know, I was a bit disappointed to find out that both strategies are almost equal in term of money. I guess that when you factor in everything, several techniques will come down to this results :sad: 911, I Know, I was a bit disappointed to find out that both strategies are almost equal in term of money. I guess that when you factor in everything, several techniques will come down to this results :sad:

]]> By: Investing911 http://www.thefinancialblogger.com/134/comment-page-1/#comment-378 Investing911 Tue, 28 Aug 2007 11:16:05 +0000 http://www.thefinancialblogger.com/134/#comment-378 Great analysis. The thing I find frustrating is at the end of the day it boils down to them being pretty much equal. I've always played around with RRSP scenarios and tried to get the best deal. For example, when I graduated I was making 30k a year - I went through great debate to decide weather I should use my RRSP deduction in the year or carry it forward to another year where I will be at a higher tax rate. I ended up using the deduction and taking the dollars today. Thanks for the plug too! Great analysis. The thing I find frustrating is at the end of the day it boils down to them being pretty much equal.

I’ve always played around with RRSP scenarios and tried to get the best deal. For example, when I graduated I was making 30k a year – I went through great debate to decide weather I should use my RRSP deduction in the year or carry it forward to another year where I will be at a higher tax rate. I ended up using the deduction and taking the dollars today.

Thanks for the plug too!

]]> By: FourPillars http://www.thefinancialblogger.com/134/comment-page-1/#comment-377 FourPillars Tue, 28 Aug 2007 02:08:27 +0000 http://www.thefinancialblogger.com/134/#comment-377 Good point, I normally assume there is no pension since I won't have one but obviously that won't be the case for everyone. Mike Good point, I normally assume there is no pension since I won’t have one but obviously that won’t be the case for everyone.

Mike

]]> By: The Financial Blogger http://www.thefinancialblogger.com/134/comment-page-1/#comment-376 The Financial Blogger Mon, 27 Aug 2007 13:37:46 +0000 http://www.thefinancialblogger.com/134/#comment-376 Mike, When I wrote about this topic, I used Ernst & Young marginal Tax Calculator. I used the marginal tax rate instead of the average tax rate. It is true that if your RRSP withdrawal is your only source of income, your average tax rate on the withdrawal of 38K or so will be 17% (according to EY). However, if you receive Gov pension income along with a private pension income, your RRSP withdrawal have better chance to be taxed at a higher rate. However, as we used the same tax rate in both example, the effect will be the same. As you noticed in my 2nd post on this topic, there are several ways to look at this situation. This is what is so great about Personal Finance ; one problem, several solutions :wink: Mike,
When I wrote about this topic, I used Ernst & Young marginal Tax Calculator. I used the marginal tax rate instead of the average tax rate.

It is true that if your RRSP withdrawal is your only source of income, your average tax rate on the withdrawal of 38K or so will be 17% (according to EY). However, if you receive Gov pension income along with a private pension income, your RRSP withdrawal have better chance to be taxed at a higher rate. However, as we used the same tax rate in both example, the effect will be the same.

As you noticed in my 2nd post on this topic, there are several ways to look at this situation. This is what is so great about Personal Finance ; one problem, several solutions :wink:

]]> By: FourPillars http://www.thefinancialblogger.com/134/comment-page-1/#comment-375 FourPillars Mon, 27 Aug 2007 12:51:21 +0000 http://www.thefinancialblogger.com/134/#comment-375 Interesting post, I never thought about counting the interest saved as an investment contribution which I think is a good way to calculate. One point - you mention that the interest amount adds up to $37,961.18 in the rrsp. Then you reduce this amount by 35% for taxes - this is incorrect since the marginal rate only applies to certain parts of the withdrawal. If you go to the income tax calculator on taxtips.ca you can find out the correct net income. When I plug in the $37,961.18 for Ontario I get a net income of $31,136 with an average tax rate of 18% (not 35%) as you have. The same issue applies for the rrsp side of things, the $40,169.43 rrsp will result in a net income of $32,624. This may not change the argument very much but it's a more accurate way to calculate the effects of taxes. Mike Interesting post, I never thought about counting the interest saved as an investment contribution which I think is a good way to calculate.

One point – you mention that the interest amount adds up to $37,961.18 in the rrsp. Then you reduce this amount by 35% for taxes – this is incorrect since the marginal rate only applies to certain parts of the withdrawal. If you go to the income tax calculator on taxtips.ca you can find out the correct net income. When I plug in the $37,961.18 for Ontario I get a net income of $31,136 with an average tax rate of 18% (not 35%) as you have.

The same issue applies for the rrsp side of things, the $40,169.43 rrsp will result in a net income of $32,624.

This may not change the argument very much but it’s a more accurate way to calculate the effects of taxes.

Mike

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