The purpose of an RRSP is to help reduce your tax payable so that it is “easier” to find money to invest for your retirement. (You can save without an RRSP. But anything that keeps more of your money in your hands and out of the taxman’s pocket is a bonus for you.)
If you haven’t yet made contributions for 2015, you only have until February 29, 2016 to qualify for the tax savings on your 2015 tax return.
If you have the money, or you can find it with a few smart money management practices, making your maximum allowable RRSP contribution every year makes good financial sense. But before you scramble to get money into your RRSP, take a moment to ask yourself if this year, that is the best use for your money.
If you are carrying credit card or line of credit balances that you are not paying off every month, you might be farther ahead to skip the RRSP this year and use that money to retire the debt. You won’t get the benefit of tax savings. But over the course of the year you could save as much or more in savings on debt servicing payments.
On the other hand, if your RRSP contribution is likely to result in a meaningful tax refund – not just a reduction in tax payable, but an actual refund of tax paid – and you use the tax windfall to pay down debt, you end up winning both ways.
Before you decide which is the better financial choice, answer these questions:
- How much debt are you carrying? And how much of it is high interest debt that doesn’t build equity?
When you’re loaded down with credit card debt and a line of credit that is mostly maxed out, paying off the debt should probably take priority over your RRSP contribution this year.
- Are you close to retirement?
The closer you are to that point in time where you plan to stop working, the more you should focus on eliminating debt, including your mortgage. The surest path to a comfortable retirement is to enter into it debt-free and living in a home you own with no strings attached. Twenty thousand dollars in paid off debt today will deliver a faster return than an investment that needs many years to grow.
- What kind of RRSP do you have?
If you have a group RRSP and your employer matches your contribution, it may make more sense to put money into your RRSP and double your investment. Moreover, having an employer means you are on a salary, which means your RRSP contribution is likely to result in a cash refund that you can use to pay down debt.
Only you know what makes more sense for you today.
If your debt load is only growing bigger and you can’t see your way to retiring it over a reasonable period of time, talking with a debt professional may be the wisest financial choice of all.
The shed the debt® professionals at Goldhar & Associates Ltd. will review your personal financial situation in a free and confidential meeting, and then offer suggestions on how you might reduce or eliminate your debt and get a fresh start on building a solid financial future. There is no obligation to proceed with any of the strategies proposed. It could be a life-changing discussion.
Shed your debt this year, and this time next year you won’t have to choose between paying down debt or contributing to your RRSP.
To arrange a free, no obligation consultation with Goldhar &Associates Ltd., dial #debt on your mobile phone, or call 1-855-541-5114. Or use this easy contact form: http://shedthedebt.ca/contact
Anywhere in Ontario there’s a Goldhar & Associates office near you. We help.