So in scenario 1 (RRSPs) instead of putting $8000 total into their RRSPs then can only put in $8000-($63*12). They pay that for their entire 20 years. In scenario 2 (debt paid) instead of putting down $8000 total into their RRSPs then can only put in $8000-($63*12) for the first 11 years, until their house is paid off. Then for the next 9 years they can put in $8000 into their RRSP.

This is a pretty gross approximation, but let’s see if it worked.

Originally, the two plans worked out about the same if the rate of return on the RRSP was about 5.7%. When I added in the $63*12/year mortgage penalty the rate of return of the RRSP had to be upped to 6.6% in order to match the debt pay-down option. If you case, you stop paying the PMI sooner so this will have less impact than it did in my approximation.

Of course if your RRSP is smaller to start with than the couple in the example, than the lower RRSP contributions will make more of an impact. If you have a $1 million nest egg already, then the reduction in your RRSP contributions will be negligible.

Let me know if you want the spreadsheet.

The calculations assumed the same marginal tax rate when contributing to the RRSP and the same when withdrawing from the RRSP later. For some this may be true, for others, maybe not. Again, it’s an assumption and one that can affect the results you get out in the end.

“Scenario 1 shows a higher RRSP value, but to access those funds the Harts would have to pay taxes on any withdrawal. To pay off their mortgage, they would have to cash in $198,336 of their RRSPs, pay $79,334 in tax at 40 percent,
and be left with the required $119,002. That would leave them with only $58,438 in RRSPs versus $91,974 for the debt pay-down scenario. The higher amount of net worth is deceptive because a large portion of it is pre-tax.”

I’m assuming this is the paragraph that you are both referring to? No where does that one-time RRSP withdrawal enter into his calculations. He is simply demonstrating that after 11 years, to really calculate their total assets correctly you have to take the RRSP as being pre-tax (and multiply it by (1-T)) and the house and liabilities as being post-tax. In other words he’s using an example of pulling all the money out of the RRSP at once to demonstrate the fact that in Scenario 1 they don’t quite have so much compared to Scenario 2 as it looks because the RRSP in both scenarios will be taxed eventually upon withdrawal.

For anyone else, I’d like like to clarify that his total assets calculation is probably not the ideal way of doing it. His “total assets” line includes the addition of pre-tax assets (the RRSP) and post-tax assets (the house) and liabilities (the mortgage). It is probably better to convert all to post-tax, then add them up. In other words the entire RRSP should have been multiplied by (1-T), where T is some assumed marginal tax rate before being added to the other assets.