Should I repay my debts or contribute to an RRSP first?
One of the top personal finance dilemmas is choosing between contributing to an RRSP or paying down debt. If you’ve never asked yourself this question, it may just be a matter of time. It’s not always an easy decision to make because the answer varies depending on your situation. As we will see, there are several factors to consider.
Dominic Iannuzzi: Investment Manager
- § Your level of debt
If you are really concerned about your debts, you could try to bring them down. You should prioritize paying off debts that you cannot deduct from your taxable income first and then the ones with high interest rates, such as certain credit card balances. If you feel overwhelmed by debt, it may worth talking to your advisor about debt consolidation.
- § Interest rates
It's important to compare the interest rates on your loans, including your mortgage, with the estimated rates on your RRSP. If the expected rate of return on your RRSP is much greater than your borrowing rate, then your decision will be that much easier (once the minimum payments to your mortgage are made, of course). However, if the gap is narrow, RRSP contributions may still be worth considering because, in addition to being sheltered from tax, they allow you to make the most of the long-term benefits of compound interest.
Keep in mind that these are rules of thumb and that an expert like an advisor or financial planner is still in the best person to help you with this dilemma. There's also something to be said for killing two birds with one stone. Who said you had to choose one or the other? Contribute to your RRSP and then use your income tax refund to either reduce the outstanding balance on your mortgage or make an additional RRSP contribution. The latter would generate even more compound interest!
In closing, I'd like to point out that, regardless of your situation, you should never overlook saving for retirement. It is definitely one of the most important investments you'll ever make. And that's really worth thinking about!
National Bank Financial