As RRSP season approaches, you’ll see all kinds of ads about the money you can make investing. Not to mention the tax benefits. But if you have a lot of debt, consider your choices carefully. If you contribute to your RRSP you may pay less tax. But if you pay down your debt, you will pay less interest. Which is better?
Some experts say it is easy to decide. Simply ask yourself: What rate of return are you getting from your RRSP? What interest rate are you paying on your debt? Go with the higher one.
The truth is, it‘s a little more complicated than that. The right answer for you depends on many factors. For example, you need to know:
- What does my debt cost me each month or year? Not all debts work the same. Mortgages are different from credit cards, for example.
- Are there fees or penalties if you pay your debt off faster?
- How do you plan to invest the money in your RRSP? If you put money in safe investments that guarantee your return, your money will grow more slowly. But if you choose investments that may grow faster, there is no guarantee what you will make. You may even lose money.
- How much tax will you save if you contribute to your RRSP this year?
- What costs will you pay to invest?
There are also personal factors to consider. Before you decide, you need to know:
- When does it make sense to contribute to my RRSP?
- When does it make sense to pay down debt instead?
- Can I do both: pay off debt and contribute to my RRSP?
- How do I decide which choice is right for me? Try our new calculator!
You may also want to read Jasmine's story to learn how someone close to retirement made her choice.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.