As you race toward the March 2nd RRSP deadline, your clients may tell you they prefer any extra cash go toward their mortgages.
But, while paying off debt is usually a great move, interest rates are at a 60-year low, says Jamie Golombek, managing director of tax and estate planning at CIBC Wealth Advisory Services.
So clients should consider RRSP contributions instead. With debt levels at record highs, he explains, that may seem “like a luxury many people don’t believe they can afford. But the decision to pay down debt in a low-interest-rate environment could come at the expense of retirement savings.”
As a recent CIBC poll finds, the majority of Canadians (72%) would put money toward debt instead of retirement savings. As Golombek points out, however, clients can get five-year fixed mortgages for less than 3%, and 10-year fixed mortgages for less than 4%.
As such, clients who expect to earn higher after-tax returns in the capital markets should consider allocating debt repayment funds to their 2014 RRSP contributions. If they go that route, advisors should also remind clients that when investing in stocks or bonds, they could lose part of their principal. On the other hand, paying down debt is akin to investing in a Government of Canada bond, says Golombek.
So, he says, tell clients, “If you’re willing to tolerate some risk in your investment portfolio, while saving for a long-term goal that could be 20 to 30 years away, choosing to invest in an RRSP or TFSA can actually result in more money, albeit with the assumption of greater risk.”
He adds clients should always pay off high-interest credit card debt quickly, since it’s unlikely they’ll be able to earn more than 20% in the capital markets.