Comment From Guest: Hi Suzanne, In todays current economic climate, should debt be the primary focus over RRSP,TFSA,RESP?
Suzanne Schultz: Again, it depends. If you have a lot of consumer debt (not a mortgage) then I think that needs to be tackled ASAP. After that, where you invest depends on your needs and tax rates. If you are taxable, and in particular when you need a tax write-off, RRSPs are great as they provide a dollar for dollar deduction against your income. And there is a psychological advantage in that many people won't touch their RRSPs when they need cash, so it will be there for retirement. TFSAs are great for an emergency fund or if you've already saved in your RRSP and want to supplement your savings. RESPs are great to save for school but I personally believe you need to take care of your financial situation first, including retirement, then save for education. Kids can always work to put themselves through school. Its great to have help, but don't forgo your own financial needs for this.
Comment From Kathryn: I am a recent law school graduate. I have debt from OSAP and debt from a line of credit. The OSAP debt is less and the interest I pay can be used for tax credits, but the interest rate is higher. The debt from my line of credit carries a lower interest rate, but cannot be used for tax purposes. Do you have any advice on which to pay down more quickly, or first?
Suzanne Schultz: Without actual interest rates, I can't tell you for sure, but I think you're smart so you can probably figure this one out. You need to determine the after tax cost of the interest to see which is actually lower. If the rates are similar, then the OSAP is probably cheaper on an after tax basis so pay off the line of credit first. If the OSAP is significantly higher, given that you only get a non-refundable tax credit (worth 15 per cent federally), its probably best to pay down the OSAP first.
Comment From modan: Hi Suzanne, I'd like to get your thoughts on borrowing for RESP contributions. My eldest is 2 1/2 years until university and I don't have nearly enough saved for his education. We live in Nova Scotia which has the 2nd highest provincial income tax rates and the highest tuition rates. Should I put myself in debt in order to take advantage of the RESP grant contributions?
Suzanne Schultz: If you already have an RESP, then it can make sense to borrow (in this case) so that you can get the Canada Education Savings Grant (CESG) for your contributions. However, the interest is not deductible, nor is the contribution. If you don't have an RESP already, there are age limits on the CESG, and therefore, if you don't qualify, I wouldn't borrow for the RESP. Instead, in that case I would start saving, preferably in a tax free savings account so you will have the money when you need it, but won't pay tax on the earnings in the meantime. The CRA website has some great information on RESPs. Click here for a link.
Comment From David: My wife and I have multiple lines of credit and OSAP loans, and we just graduated. We do not have any RRSPs. Should we start putting money into RRSPs or use that money to pay off our loans? Thanks.
Suzanne Schultz: RRSPs are a great way to save for retirement but you really only get bang for your buck right now if you are taxable. Given that you just graduated, you might not need the tax deduction, especially if you have tuition credits to claim. I would tackle the student debt now, and possibly consolidate those lines of credit to make the payments more manageable (its really hard to keep track of multiple payments each month). Make sure you pay more than just the interest on the debts as well...some lines of credit only require interest payments which means you are never paying off the principal. Once you start making more money and need a tax write off, get RRSP contributions taken right off your pay, if you can. Your tax will be reduced at source, which means you get your tax break up front. You might be able to afford a higher contribution this way.