It’s a question financial planners are asked all the time: “Should I contribute to an RRSP, or pay down my mortgage ...?” And for families with children, a third puzzling option usually gets attached to that question: “... or contribute to the kids’ RESP?”

Experts say that when sound financial planning takes precedence, competing priorities fall away.

“Why can’t it be all those things?” says Howard Kabot, national director of financial planning with the Bank of Nova Scotia in Toronto. “They’re all very important. We want to save for retirement, pay down our mortgages and debt, and save for a child’s education.”

The key, he says, is responsible, long-term financial planning — and avoiding the temptation to consume and spend excessively. “We see families that are spread thin,” he says, “and they don’t have to be.”

However, experts also realize that most families with children have scarce financial resources at least some of the time. That’s why it’s important to have a clear set of priorities about how to save and invest your hard-earned income.

“There’s only so much coming in on a monthly basis and then, of course, you have expenditures,” whether it’s putting food on the table, or giving the kids piano or soccer lessons, says Mr. Kabot.

Some financial advisers recommend that regular contributions to RRSPs and RESPs should take precedence over paying off a mortgage. It is not as necessary to worry about accelerating payments on a mortgage, they argue, as long as that mortgage is being paid on a regular basis.

That’s what Lino Varano believes, too.

Every year, the 47-year-old teacher at Toronto’s Beverley Heights Middle School makes the maximum contribution to his registered retirement savings plan so that he and wife Giovanna (who does the same with her RRSP) can enjoy their planned retirement in 11 years.

The couple also contributes the maximum to registered education savings plans set up for their daughters Eva-Marie, 12 and Gabriela, 9.

“Investing in both RRSPs and RESPs is a very important means of helping us look after our own, as well as our daughter’s, futures,” says Mr. Varano, who is also a professional musician.

Experts are bullish on both RRSPs and RESPs because each can have a profound impact on a family’s financial health.

An RRSP offers both long- and short-term advantages, notes Myron Knodel, a manager of tax and estate planning with Investors Group Financial Services Inc. in Winnipeg. Over the long term, it provides tax-deferred compound growth on the interest earned from the principal contribution. But it also provides immediate tax relief in the year that the contribution is made because it can be deducted from taxable income.

Money inside a tax-sheltered RRSP can grow into significant retirement savings over a long period of time. And the plan is structured so that the tax is deferred until funds are withdrawn at or near retirement age, when the investor is usually in a lower tax bracket.

Although there is no immediate tax deduction for contributions to an RESP, as there is with the RRSP, the invested funds accrue profit (including interest, dividends or capital gains, depending on the underlying investments) on a tax-deferred basis until needed for the child’s education.

The money withdrawn is payable to the student “who may or may not earn enough income to be in a tax bracket,” so the potential exists for the family to withdraw the funds “with very little, if any, tax at all,” says Dan Bodanis, a senior financial adviser with Dundee Private Investors Inc. in Mississauga, Ont.

“Plus you’re funding your child’s education, which is probably the greatest investment you could ever make,” he adds.

The annual contribution limit for an RESP is $4,000. But the federal government supplements that with the Canada Education Savings Grant, a 20-per-cent matching payment that tops out at $400 a year. (The CESG can be slightly increased for lower income families.)

There is a $42,000 lifetime cap on contributions to an RESP but, of course, the amount in the plan could grow well beyond that with compound interest, reinvested dividends, and any accrued capital gains. For investors who need to prioritize where their money goes, especially those with young children, Mr. Bodanis favours putting money in an RRSP first and then using the resulting tax refund to fund the RESP, before paying down a mortgage.

The reason he favours the registered savings plans over the mortgage is because the real estate market is volatile; housing markets can slow down and values depreciate. Mr. Bodanis says RRSPs and RESPs offer more diversification and tend to be more flexible and profitable investments in the long run. Jim Yager, on the other hand, favours paying down the mortgage as a first priority under certain circumstances.

Over the long term, argues the Toronto based partner with KPMG LLP, it may be difficult for most investors to earn better interest from their investments compared to the interest that is payable on their non-tax-deductible personal mortgage. Reducing a mortgage that carries 6 per cent or 7 per cent interest, Mr. Yager argues, “is like getting a six or seven per cent tax-free return, as opposed to a tax-deferred return.”

In the relatively low interest-rate environment Canadians currently enjoy, Mr. Kabot says, a family might want to put more emphasis on paying off their mortgage. He points out that a homeowner in a 50-per-cent tax bracket who is paying five per cent on the mortgage is really paying 10 per cent in before-tax money.

Mr. Kabot says that home owner might want to ask, “What sort of growth am I getting on my RRSP? Am I getting 10 per cent?” If not, the family’s “overall net worth might be improved by paying the mortgage down more quickly.”

Experts also stress that smart investors leverage the savings generated from one activity — such as the tax refund from an RRSP contribution — and apply it to another key family priority, such as paying down a mortgage or contributing to an education savings plan. Special to The Globe and Mail