Liquidate TFSA to pay off Mortgage or renew at 5.7% 5 yr Fixed?

[squidomerer]

@1soloved You do get back the contribution room in next year after you do the withdrawal so this point doesn’t make sense

 

[carolyntormala]

@squidomerer If I’m understanding this right it’s the opportunity cost of inflating your TFSA over time.

For sake of easy math let’s say my current TFSA of 160k averages 5% every year.

So;

2025: 168k + 7k contribution
2026: 183k + 7k
2027: 200k + 7k

Total room: 207k

3 years from now my TFSA would be 207k if I left the money in the TFSA. Hence contribution room would be 207k the following year if I pulled the entire 207k in 2027.

If I pull all my TFSA out this year, in 2027 my contribution room would be;

2025: 160k + 7k Contribution
2026: 167k + 7k
2027: 174k + 7k

Total room: 181k

So that’s a loss of 26k contribution room over 3 years.

I think this makes sense?

 

[1soloved]

@carolyntormala Exactly!

So its basically depends also on the value you place on that, which will be different for everyone, but just another thing to consider.

 

[sofarfromfaze]

@1soloved The contribution room isn't contribution room if you never withdraw the money though.

 

[kclintsman]

@sofarfromfaze No but it’s tax free money that has grown over time that you don’t have access to if you drain the account.

 

[sofarfromfaze]

@kclintsman Yes but if the mortgage is paid you have the extra cashflow to make up for it.

 

[kclintsman]

@sofarfromfaze You’re misunderstanding the point that was made. By using the funds in the TFSA you are losing EXTRA “contribution room” that would have been created through investment growth.

If you keep your TFSA maxed at 140k and assume a 5% annual rate of return then after year one you will have (140k * 1.05) + 7k (annual cont.) = 154k. You gained an additional 7k in “contribution room”, or money available in your TFSA to grow tax free, because of the 5% return you earned.

If you had withdrawn everything from your TFSA to pay your mortgage, yes, you can pay it back aggressively but that first year you only gain the 7k annual contribution room. You missed out on the additional room created from the growth, which over time, can end up being a substantial benefit. To re-max your TFSA it will likely take a few years.

 

[sofarfromfaze]

@kclintsman You are viewing only from a growing your TFSA perspective not growing your net worth perspective.

 

[1soloved]

@sofarfromfaze Your wealth grows faster in a TFSA than a non registered account.

If one does no savings in their TFSA, pays off their mortgage first, then saves more money down the road, their TFSA will be significantly smaller, and therefore, they would accumulate more non registered assets.

What the breakeven point depends on expected ROI, average mortgage rates over the 25 year term, and your marginal tax rates.

 

[squidomerer]

@carolyntormala Thanks, this makes sense. Down the road , remaining TFSA invested does yield bit more return compared to paying off mortgage.
How much difference? that depends on the remaining duration of mortgage and future mortgage interest rates.

 

[newberryw1]

@carolyntormala You will lose all the interest you could have been making if you cash out. There is no guarantee you will put back the 160k quickly. At this point you have $160k and a house. 200k mortgage isn’t insurmountable. Also rates are expected to be down. Be a little balsy, that’s how wealth is created.

 

[iviatthew]

@carolyntormala I’m in an almost identical situation minus the baby.

The only hesitation I have is losing a huge buffer of savings should something change or I just need a big chunk of money for something. That and the mental optics of having a big chunk of money generating more money (even though I know it’s a wash with interest payments)

 

[htbarrelracer]

@carolyntormala First 6 years of a baby is cake.from the double payment from government. Bonus of you have family to buy you stuff like stroller, crib etc. I would renew.

 

[christiano1988]

@htbarrelracer Since when... our 20month old costs us about $2k/month more than OP's mortgage.