Should you contribute to your RRSP or pay down debt?

September 22, 2014 at 11:14 am Leave a comment

rrspWhen it comes to money decisions, it can be hard to figure out the right thing to do. Money is about power, emotion, morality, and security, among other things. The Financial Post’s Melissa Leong gathers experts to weigh in on a financial quandary.

This week’s question: Should you contribute to your RRSP or pay down debt?

Bruce Sellery, personal finance expert and author of The Moolala Guide to Rockin’ Your RRSP: There are two factors to consider here: math and mindset. In today’s ultra-low interest rate environment, there isn’t a very big incentive to pay down your mortgage. If you put your extra cash there, you’ll “earn” a guaranteed return equal to your mortgage rate, say 3.0%. If, instead, you put the money into your RRSP and invest it in the stock market through a low-cost fund, your after-tax return over time could be, say, 4.5%. Not great, but better. Plus, the higher tax refund you’ll receive can go to debt repayment or right back into your RRSP. And you’ll be diversifying your assets so that you are not so reliant on the health of the housing market. All that said, your mindset matters too. The stock market is by no means guaranteed. Some people simply sleep better at night knowing that they are plugging away at their mortgage.

Now, if you’re carrying high-interest credit card debt, the answer is much simpler. Pay. Down. The. Debt. Eliminating that 15-20% interest payment is much better math than contributing to your RRSP. And your mind will rest easier too.

Jason Heath, fee-only certified financial planner: Like many financial decisions, it depends. If you have debt besides your mortgage, especially an unsecured line of credit, a bank car loan or credit card debt, I’d lean towards paying those off first. If you’re in a low tax bracket, that’s another reason to lean towards debt repayment. If you’re a conservative investor, consider debt over RRSPs. But if you’re in a higher tax bracket, have a reasonable risk tolerance and your debt is mostly just mortgage debt, RRSP contributions are likely to give you a higher net worth 20 years down the road than paying down your mortgage.

Evelyn Jacks, president of Knowledge Bureau and author of 51 books on tax preparation:You always want to manage the use of expensive consumer debt and long-term mortgage debt by paying it down as quickly as possible, especially because the interest is usually not deductible.  But the dilemma for most people, especially those who live paycheque to paycheque, is where to find new money? If you have taxable income, do both – contribute to an RRSP and then use the tax savings to pay down debt. The RRSP provides a number of opportunities: it immediately creates “found money” that otherwise would be lost to taxation; the money can be withdrawn tax-free under the RRSP Home Buyers’ Plan or Lifelong Learning Plan (as long as you pay it back as required); and there is an opportunity to fund a spousal RRSP in the case of couples, which can facilitate retirement income planning before income splitting opportunities are available at age 65.

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