Using a RRIF to pay down the mortgage

Should you eliminate debt with savings? Not always



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Should you raid your RRIF to pay down your mortgage? (Getty Images / David Frank)

Should you raid your RRIF to pay down your mortgage? (Getty Images / David Frank)

Q: I have apprxoximatley $440,000 in a Canadian RRIF. I  have a mortgage of about $268,000 and pay about $2,000 a month against that mortgage. Does it make more sense to sacrifice the RRIF, pay the tax, to pay off the mortgage or continue to pay the monthly payments? The property value is about $400,000. We are planning to downsize in the near future.—John

QA: John, your question is a common one perhaps because the closer a person gets to retirement the less they want to worry about debt. However, getting rid of debt isn’t always a prudent step. But seeing as this question is not just about real estate, I asked MoneySense contributor and Certified Financial Planner, Jason Heath, to weigh in.

His advice was simple: No. Using a one-time withdrawal from your RRIF to pay off your mortgage doesn’t make sense primarily because this action would attract a lot of tax. As soon as you withdraw any money from you RRIP this sum would be added to your other sources of income and would likely be taxed at 50% or more if you take into account the potential clawback of your Old Age Security pension, explains Heath. A reasonable return on your RRIF is probably about the same annually over time as your mortgage rate, meaning the “RRIF income and the mortgage interest are kind of a wash—or close enough that paying 50% tax wouldn’t be worth it,” explains Heath.

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Instead, consider a slow and steady drawdown on your RRIF to continue repaying your mortgage. Also, if you know downsizing is right around the corner consider moving up your timeline to lock in the appreciated value of your current home. Don’t forget anything you earn from selling your primary residence is tax-exempt and you don’t necessarily have to find the next place to live immediately if you consider renting for a year or two an option.

Best of luck on the upcoming changes.

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