Should I Cash In My RRSP to Pay Off My Mortgage?

Should you pay off a mortgage with RRSP funds or keep investing?

Using money from a registered retirement savings plan (RRSP) to pay off a mortgage is tempting because it can deliver immediate peace of mind and reduce monthly obligations. However, withdrawing RRSP funds to eliminate a mortgage has important tax and long‑term investment consequences that mean it’s rarely a clear win. Below is a practical look at the main considerations and a recommended alternative approach.

1. Withdrawals are taxed as income. Any money you take from an RRSP is treated as taxable income in the year of withdrawal. Your financial institution will apply a withholding tax at the time of withdrawal, but the final tax owed depends on your total taxable income when you file your return. That can significantly reduce the net amount available to pay down your mortgage.
2. You lose RRSP contribution room permanently. When you withdraw from an RRSP you do not regain the contribution room you used. Unless you have unused current room, you cannot simply re‑deposit the withdrawn amount without generating new contribution room. That lost room means giving up years of compound growth that cannot be fully recovered—unlike a TFSA, where withdrawals are added back to your contribution room the following year.
3. Compare your RRSP returns to mortgage interest. If your RRSP investments are earning a higher after‑tax return than the effective interest rate on your mortgage, it often makes more financial sense to keep the RRSP invested while continuing regular mortgage payments. Running the numbers—after taxes and fees—will tell you whether your investments outpace your mortgage costs.
4. Timing matters for taxes and benefits. RRSP withdrawals are best taken in years when your taxable income is lower. If you withdraw while your income is high, you could push yourself into a higher tax bracket or trigger reductions in income‑tested benefits such as Old Age Security (OAS). For some retirees, RRSP withdrawals can move them into the OAS clawback range, increasing their effective tax rate substantially.

Balancing the desire to be mortgage‑free with long‑term retirement savings requires weighing short‑term relief against permanent tax and compounding costs. For many people, a more effective option is not to withdraw RRSP funds but to accelerate mortgage repayment in a controlled way.

Instead of cashing out your RRSP, consider increasing your regular mortgage payments by an amount you can comfortably afford and directing extra payments straight to the principal. That approach lowers the outstanding balance faster, shortens the amortization period and reduces total interest paid, while keeping your retirement savings intact and continuing to benefit from tax‑deferred growth.

Before deciding, run different scenarios with a mortgage calculator and factor in realistic investment returns, taxes on RRSP withdrawals, and your expected future income. Speak with your mortgage lender about prepayment options and penalties, and consult a financial advisor or tax professional who can estimate the net impact for your specific situation.

Quick summary: pros and cons

• Potential benefits of using RRSPs to pay a mortgage: immediate elimination of monthly payments, peace of mind, and less interest paid on your loan over time.
• Main drawbacks: immediate taxation of the withdrawal, permanent loss of RRSP contribution room, potential to forfeit years of tax‑deferred compound growth, and possible negative interactions with income‑tested government benefits.
• Practical alternative: increase payments directed to principal where possible, keep RRSPs invested, and revisit contribution and repayment plans annually as your situation changes.

Read more about investing and mortgages:

• Should you sell investments at a loss to pay off debt?
• Should you accelerate your mortgage payments—or invest?
• Should you hold your mortgage inside your RRSP?
• Contribute to RRSP or pay off mortgage?
• Borrowing money to invest