RRSP Q&A: Should we withdraw to pay down mortgage? - MoneySense

RRSP Q&A: Should we withdraw to pay down mortgage?

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From February 16 to 19, 2010, MoneySense.ca’s top financial planners are answering your RRSP questions. For the full list of questions answered — or to submit a question of your own — click here.

My wife and I are in our mid 30s. I work for the federal government and plan to retire when I have a 60% pension (=$70,000/yr). My wife is taking five years off her job to raise our kids until they go to school.

We each have about $150,000 in our RRSPs but are wondering if we should withdraw money from my wife’s RRSP over the next few years to substantially pay down the principal on our mortgage ($250,000, 10Y, 35A, 6%) now that my wife is in the bottom tax bracket (with no income at all). This is not our first house so we can’t loan ourselves money from the RRSP. Are we crazy to tap into her RRSP in our 30s? — Graham

Karin Mizgala: Congratulations on accumulating such a great RSP base in your 30’s. I recommend keeping your RSPs intact and ensuring that you have the appropriate mix of low cost RSP investments that have the potential for a 6-7% long term rate of return. (ie. 60-70% equities). Even though your wife could withdraw around $10,000 from her RSP annually without incurring tax, you would lose the “spouse amount” deduction and your taxes would be higher (approximately $1,700 higher at an income of $70,000).

Your wife would also lose the benefit of tax-sheltered compounding in her RSP which would be substantial given your ages and savings. As long as you can live within your means now and pay off your mortgage before retirement, you will have significantly more flexibility in the future if you don’t touch your RSPs.

Next question: What can my stay-at-home wife withdraw without incurring tax?

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