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My RRSP is topped up, so I plan to invest a $20,000 windfall outside my RRSP. Would it be better if I paid down my mortgage?

This will depend on issues such as what the interest rate is on your mortgage, how soon it would be paid off, your tax bracket and what kind of return you might receive by investing.

Let's assume the interest rate on your mortgage is 7%. If your taxable income is between $29,590 and $59,180, you're in the middle income tax bracket. This means that your marginal tax rate -- what you pay on your last dollar of income -- will be about 40%. So you would pay about 40 cents in tax on every dollar, and keep 60 cents.

What this means is that you have to earn more than you might think to pay your mortgage. To end up with every $1 you pay in mortgage interest each year, you need to earn $1.65. The interest on your mortgage isn't tax-deductible. It must be paid with after-tax dollars. (Your mortgage could be made income tax deductible if you paid off the mortgage and then arranged for a new mortgage where that loan was used to buy investments).

Now let's look at the investment angle. If you invest $20,000 in a GIC that earns 5% a year outside an RRSP, your after-tax return is $600, or 3%. If you instead use that money towards paying your mortgage, your after-tax return is $1,400 (7% interest saved on $20,000), or a full 7%. Here's the key question. How does the after-tax return of paying down your mortgage compare with the return you'd receive -- or expect to receive -- from investing. If you invest, you need better than a 7% after-tax return to beat the mortgage paydown.

You likely won't find any interest-paying investment -- or at least not many with low risk -- which will give a 7% after-tax return. Few dividend-type investments offer returns that high. Returns of more than 7%, over the long-term, have historically come from common stocks. But these capital gains come with a risk. There's also great potential to lose money on stocks, particularly if you are investing for a short period. Stock prices have tended to rise over the long term, but they can collapse from time to time, too.

The marginal tax rate on capital gains for someone in the middle tax bracket is about 30%. That means you would have to generate a before-tax return of more than 10% to beat the mortgage paydown on an after-tax basis. Some investors may earn returns averaging in that range, but many earn less. The appeal of a mortgage paydown is that it's a sure thing.

You will save substantial interest costs if you pay your mortgage down in the early years. This avoids years of interest payments on that money. Also, if you have a large mortgage, you may have peace of mind from paying it down.

On the other hand, merely paying off your mortgage quickly without also putting investment dollars aside over the years can have its downside. You could end up with a mortgage-free home but also with no nest egg to fund your retirement.

Putting money in your RRSP, making other investments and also paying down your mortgage is a combination worth considering. Since the growth on RRSP contributions is sheltered from tax as long as it stays in the plan (and the contributions give you a tax deduction), it makes sense to maximize those contributions before starting to make non-RRSP investments.

Consider seeking professional investment advice. A strategy that suits one investor may not meet your needs