Individual salaries and tax rates are often key in deciding how much money to allocate where, as are other cash management issues and your overall financial situation. In a perfect world, we would fully contribute to both the TFSAs and RRSPs and at the same time, also aggressively pay down the mortgage. However, much of the time this is not feasible.
Katie, you mentioned you’re considering “holding off,” or waiting a bit, before making more aggressive payments on your mortgage, as well as wanting to give more attention to your investments. If your investments are in a good mix of growth and dividend-paying stocks, your overage long-term investment returns would likely be greater than your existing mortgage rate. In this case, paying down the mortgage would likely not be your first priority.
Even so, you may also want to consider paying down a portion of your mortgage. A lump-sum amount—even a modest $10,000 or $20,000—put toward the mortgage principal can significantly reduce the amount of interest one pays in total on the life of the mortgage. Making a mortgage prepayment provides a huge psychological boost, too.
Compare the Best Savings Accounts in Canada
Katie and Tom, given that you are a fairly young, perhaps your salaries are not at the point where the tax deduction from a large RRSP contribution is significant and impactful. RRSP contributions trigger larger tax deductions (and possible refunds) at higher salary levels (say, $80,000 or more). If both of you have salaries that are modest but still growing, putting some of the critical illness payout money in each of your TFSAs is a better choice right now. Investments in those TFSAs will generate solid, tax-free returns for a lifetime—leaving the RRSP contributions for a later time when salaries are higher and the tax benefit will be greater.
Still, because you are not required to claim the tax deduction from RRSP contributions in the year the contribution is made, you have the option of contributing now and “spreading” the tax deduction over a few years. If you want to consider this plan, you should speak to a tax accountant and see how this deduction approach can be of maximum benefit to you over the coming years.
Remember, TFSAs provide more flexibility than RRSPs. The money inside TFSAs can be allocated to shorter-term goals and objectives (like saving for a down payment on a cottage, as payment for tuition towards upgrading your professional skills in the coming years, etc.), or to longer-term goals, including retirement. An RRSP, however, is an investment that will generally have more impact at retirement.
Since you have significant outstanding contribution room for both your RRSPs and TFSAs, it may be prudent to allocate significant sums to all of these plans. One possibility is to maximize contributions to each of your TFSAs and then contribute $30,000 to $40,000 or so toward each of your RRSPs. Again, an accountant can help you decide the most tax-efficient way to make this contribution.