When planning for retirement, which vehicles offer the best return on your investment – investing in RRSPs, Tax Free Savings Accounts (TFSAs), financial assets that generate capital outside of registered plans, or making accelerated payments on your mortgage?
That was the question posed by the Certified General Accountants Association of Canada in its latest research report – and its findings may surprise you.
While most people would assume RRSPs are the best route to go – especially given the marketing push they receive by financial institutions and advisers – they actually don’t give you the biggest bang for your buck if you factor in the amount they’re taxed after retirement. The research report revealed that, for lower income earners without dependents, RRSP investments are your best savings option if you’re renting, and don’t have a home that is generating equity. If you are a homeowner, it makes more sense to accelerate your mortgage payments rather than set aside 2% of your annual income in an RRSP because you’ll get twice the return.
If you’re in a higher income bracket, a combined RRSP and TFSA is the way to go if you’re planning on investing more than 10% of your annual income, rather than simply saving in one vehicle or the other, the report says. This is assuming you take the tax return from your RRSP investment and reinvest it in a TFSA. This lowers the tax rate after retirement because you’re splitting your savings between the two vehicles.
That being said, the CGA discovered that – regardless of your income bracket – accelerating your mortgage payments yields the highest returns compared to other savings options. However, every situation is different, and we’re not all text book cases. If you’re thinking about saving for retirement, make sure you thoroughly assess your options and determine which route makes the most sense for your particular circumstance.
To see the report in its entirety, visit the website here: