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Enough Bull: How to Retire Well without the Stock Market, Mutual Funds, or Even an Investment Advisor, 2nd Edition by David Trahair

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Chapter 3Buy a Home and Pay off the Mortgage

Which is more valuable, an RRSP (or RRIF) worth $400,000, or a house worth $400,000?

From a simple tax point of view, you’d be better off with the house, and I’ll tell you why.

The reason is that the funds in the RRSP/RRIF are pre-tax. You can’t spend an RRSP or RRIF. You have to withdraw the funds and report the amount on your income tax return and pay tax on it. If you withdrew all $400,000 at once, a lot of it would be in the highest tax bracket. You’d only get to keep the amount left after tax. In Ontario in 2014 that would be approximately only $235,000.

This is because you got a tax refund in the first place when you made the RRSP contributions over the years.

We’re going to look at the advantages of owning a house over an RRSP but let me be clear: not everyone can afford a house, and even if you can, you’ll probably also need an RRSP to fund your retirement.

Gains in Value are Tax-Free

The increase in value of your principal residence is not taxed as it occurs, and the difference between what you paid for your home and what you sell it for – the capital gain – is not taxed when you sell. The increase in value of an RRSP/RRIF is also not taxed as it grows, but it is taxed when you withdraw it and it’s taxed as regular income.

This is an important point to think about. If you own stocks or equity mutual funds in an RRSP, the capital gain on their sale is not taxed at 50% of the gain as in a normal investment account. The whole ...

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