Dale Jackson, staff for The Globe and Mail | February 4, 2011

Canadians are another RRSP season older – and deeper in debt.

In 2010 we owed $1.48 for every dollar we earned, up from $1.45 the year before. According to the Ottawa-based Vanier Institute of the Family we’ve climbed high on the debt mountain: In 1990, the figure was 90 cents.

What’s worse, these figures tell only part of the debt story because they include mortgages, or what experts call ‘good debt.’ A recent survey by the credit bureau TransUnion showed that roughly 25 million Canadians with debt owe an average of $25,000 each – not including mortgages. That kind of consumer debt can attract interest rates nearing 30 percent for retail credit cards.

It’s a shocking contradiction that so many people are fixated on making contributions to their registered retirement savings plans as they sink deeper in debt, says Oakville, Ont., accountant, author and debt crusader David Trahair. “Debt levels are going up, and that’s the wrong direction,” he says.

Trahair is not alone in his concern. The Bank of Canada has repeatedly warned Canadians to get their financial houses in order. “There’s a lot of people who will never pay off their mortgage by retirement, and they’re trying to save in an RRSP at the same time,” he says. “That doesn’t sound like a good recipe for a solid retirement.”

People with consumer debt, or a mortgage amortization period that would keep them in debt when they retire, should tackle that debt before making an RRSP contribution, he says. In both cases, reducing debt is likely to generate a better return than any investment inside an RRSP – and paying down debt requires no fees, he points out.

Higher-interest-rate debt should be paid down first, he says; after that, borrowers should increase their regular mortgage payments to bring the payoff time closer to their target retirement date.

That’s not to say RRSPs don’t have advantages over paying down debt. Any contribution can be deducted from that year’s taxable income, and it’s the rebate that often entices contributors.

However, RRSP contributions will be fully taxed – along with any returns they generate – when they are withdrawn in retirement. (Albeit, the plan holder is normally in a lower income tax bracket by then.)

In comparison, paying down debt provides a return on investment that isn’t subject to taxation. “You have a guaranteed after-tax rate of return of whatever the interest rate is on your debt,” says Trahair.

If that debt is a mortgage it also becomes equity on a house, and houses most often appreciate in value. The capital gain generated from the appreciation of a principal residence is not subject to taxation.

He also points out that choosing to pay debt rather than make an RRSP contribution is not a missed opportunity. The allowable contribution for that year can be carried forward to future years. That tax advantage could come in handy down the road for young people who have not yet entered their high-income, high-tax-rate years.

Ted Tsiakopoulos, an economist for the Canadian Mortgage and Housing Corporation, says homeowners have good reason to regard their castles as sound investments. According to CMHC the average house in Canada has appreciated 5.7 percent annually since 1980 – even after factoring in the global real estate meltdown of 2008.

“Residential real estate prices have weathered some pretty serious storms. Over the past 30 years we’ve had an oil crisis, some continental wars, terrorist attacks, financial crises and recessions,” Tsiakopoulos says.

The rate of return for the average Canadian home should moderate over the next two years, but measured out over a 30-year period it should be just a blip – and the average appreciation will return to a more normal level.

Part of that upward pressure on prices is coming from foreign investment in the Canadian residential real estate market as nervous investors around the world continue to see it, and the strong Canadian dollar, as safe and stable, Tsiakopoulos says.

A home can also provide rental income. If you factor in rental income (including apartments) over the past 30 years, CMHC says returns are much higher. “If you look at the risk/reward tradeoff for residential real estate against other assets such as bonds, equities, gold, T-bills etc., we’ve seen about an 11-percent annualized rate of return with very little risk.”

Other income-generating options for homeowners include the ability to borrow against the equity through a secured line of credit or in the form of a reverse mortgage.

Some would consider just being able to live in the house and avoid paying rent as a dividend in itself.

Most experts warn against overestimating the role that your home plays in an individual retirement plan. They stress the need for a balance with savings – although it seems that, for now, that balance has tilted in favour of debt.