So you have some extra money and you want to know where is the best place to put it. This is always a hot topic. Each area has its own incentives.

Mortgage

So you have various pre-payment options on your mortage. By putting more money against it you will lower the amount of interest you are paying, you now "own" more of your house, you possibly increase your borrowing power (lines of credit), and you give yourself a little more peace of mind regarding your debt load.

The return on your money: The interest rate on your mortage.

Registered Retirement Savings Plan (RRSP)

In Canada we are allocated so much room in our RRSP each year (18% of our gross annual income?). Contributions to a registered trading account are tax deductible. This is a huge savings right off the bat and can even drop you into a lower tax bracket if you are sitting on the line. Also, your investments are tax-sheltered, meaning you can buy and sell taxes within the registered plan without having to pay tax on the capital gains. When you withdraw later in life you then pay tax on the withdrawl amounts as if it was a normal income.

The return on your money: The income tax rate plus the rate you expect on those investments.

Insurance Policy

For those of you with a universal or whole life policy, you can invest money (up to a maximum) into your life insurance policy. There are no tax advantages now, but the money is tax-sheltered until you take it out (or you never take it out as I discuss in Borrowing Against your Insurance Policy). You still have to pay the income tax on this money now, but your capital gains will be sheltered in the future allowing you to buy and sell stocks without any repercussions.

The return on your money: Interest rate you can achieve in your policy plus the re-invested savings on the non-taxed capital gains within the policy.

Unregistered Investments

Similar to an RRSP except for 3 major differences.

• The money contributed cannot be used a tax deduction
• The investments are not tax sheltered. When you buy and sell, you must claim capital gains on your tax return.
• Capital gains is the only tax you pay. When you do withdraw money, it is not treated as income like an RRSP.

The return on your money: The interest rate you can achieve on your investments.

What should I do?

I have followed the advice of my financial advisor. The priority he has recommended is as follows.

1. RRSP - This is the best value for you dollar. Immediate relief on tax at the early stage will compound over the years to even bigger returns.
2. Mortgage - Immediate, guaranteed return of whatever the interest rate is on your house. When the mortgage is paid off, that is a big weight off your shoulders and will free up a lot more monthly cash flow.
3. Insurance Policy - If you have the income to use it, the last place to hide money. Again, to have a tax-sheltered growth area. Not as good as an RRSP because you do not have the tax deduction on contributions and your investment options are limited. However, using the bank loan strategy later in life, you do avoid paying income tax on the money you withdraw like how the RRSP works.

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Category: Finance

1 Comments

Navin Kaul Says:
2007-10-27 13:16:22
Can you suggest any Canadian website where we get quotes on above subject.

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