One of my goals this year was to reach the contribution limit for both my RRSP and TFSA. I’m happy to say that since last week that goal has now been reached. Since I dont have any immediate plans to open a taxable account, I’ve started to wonder what I should do with any excess funds for the rest of the year.
Paying Down the Mortgage
One of the options I’ve thought about is putting extra payments on the mortgage principal. The easiest way to increase net worth (and make a guaranteed return on investment) is to pay down debt. The higher the interest rate, the higher the rate of return.
In my case I’ll have two mortgages renewing in December – both at 1.90%. One of the mortgages is on the principal residence and the other is on the rental property that we own.
If I chose to put the money on the mortgages, I’d choose the mortgage for our current home. The interest on the rental property mortgage is tax deductible and it’s a lower amount than our principal residence, so I’d put any extra money towards the principal residence.
Paying down a mortgage is by far the easiest way to deal with any extra money, but unfortunately it wouldn’t give me the highest rate of return.
The Other TFSA
Another option is to put the extra money into my wife’s TFSA. This is something I’ve been wanting to do for a while. While the TFSA has been around for a while, we haven’t gotten around to opening one for her. This is mainly due to saving towards a down payment on our current home (we managed to save 20% as a down payment), tuition costs for a master’s degree as well as putting money into my TFSA.
Putting money into her TFSA would mean tax free investment income that can be reinvested. While there is no guarantees on the rate of return, it’s likely the return would be higher using a TFSA than putting the money towards the mortgage.
We haven’t considered a strategy for the TFSA but it would likely be somewhat different than my current strategy. I tend to invest in dividend stocks when they are low, hold for the long term and reinvest the dividends. With her TFSA we may choose to go with indexing for simplicity. The costs would be kept low (using a discount broker) and it would be a low maintenance account we would review once or twice per year.
I could also put any extra money into a taxable account. This option would likely mean my taxes would go up since I would receive taxable dividend income and some capital gains.
This option is my least favourite simply because it would raise my taxes and although the returns would probably be higher than paying down the mortgage, it just wouldn’t make sense to put money in a taxable account when the TFSA is available.
Conclusion: it’s a great feeling being able to finally have the TFSA and RRSP maxed out. Now the question is what to do next. I’d prefer to avoid a taxable account and will likely focus on opening my wife’s TFSA to get even more tax-free investment income.
What would you do if you had your RRSP and TFSA maxed out?