Should I cash out my RRSP to pay off my mortgage?

Pay off the loan or continue investing with RRSPs?

Paying off your mortgage with your registered retirement savings plan (RRSP) and putting your mortgage balance back into the RRSP may not be a good idea for a few reasons.

1. When you withdraw any money from your RRSP, it is taxed as income. There is a withholding tax on the first withdrawal, but the rest of the tax depends on your other sources of income for the year you file your tax returns.
2. When you withdraw from an RRSP, you don’t take back that original RRSP contribution room and you may not be able to contribute the same amount back to the RRSP unless you have enough current room. This means that you will be giving up many years of compounded returns on your investment, and it cannot be liquidated. This is unlike TFSAs where withdrawal amounts will be added back to your contribution room the following year.
3. You may be getting a higher return inside your RRSP than the interest you are paying on your mortgage. If so, it makes sense to keep paying your mortgage while getting a higher return on your savings.
4. RRSP withdrawals are best made if your income is low, and contributions made best if your income is high. Depending on your current income, the timing may not be the best and if you receive Social Security benefits, RRSP withdrawals may put you in OAS clawback range. This would result in a tax rate of more than 50%, and rise to 62% for the highest earner in Quebec by 2023.

A better loan repayment strategy is to accelerate payments with additional—and affordable—money, applied directly to the principal. That has the effect of shortening the depreciation period, even if it means reducing or stopping RRSP contributions. Talk to your mortgage lender or use a mortgage calculator to estimate the effects of additional accelerated payments in your particular situation.

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