RRSP Contribution vs Paying Down Debt – Which Is Better?

Sometimes it can be difficult to figure out the right thing to do when it comes to money decisions. Money is about security, morality, emotion, and power, among other things. When you start working and paying off your loan, people may tell you to invest money in a Registered Retirement Savings Plan (RRSP).

RRSPs are popular since they let you save on your current income taxes while you save money for retirement. However, if you do contribution to your RRSP, then you will have less tax payment. On the other hand, you will have less interest payment if you clear the debt. Now, which is better? It depends on your financial and personal situations. There are several factors to consider when it comes to RRSP contribution vs paying down debt. Do you want to know which is better? Then consider the following factors:

Your age

Most people get worried when they are close to retirement because they have not saved enough money for living comfortably. If you are such kind of person and still having a debt of high interest, you may still need to try and empty it before you put any more cash into your RRSP. According to many financial specialists, it is recommended to go into retirement debt-free and mortgage-free.

Type of RRSP

You can also consider other benefits of your RRSP more than just payment of debt. A group RRSP, for example, can help you receive matching participations from your employer, whereas a spousal RRSP can help you to develop it for purposes of splitting income in retirement.

Type of debt

If your debt has a higher interest, then it is important to clear it as fast as possible. An example of such kind of debt is credit card debt even though not all debts that work the same. Credit cards, for instance, are very different when compared to mortgages.

Amount of debt

Notably, in case you have a debt of large amount carrying high interest, you will have a lot in payment of interest. For that reason, your need will likely be paying down the debt. Additionally, owing a less amount gives you more options. However, you may choose to put a small amount of money toward payment of debt, a little in your RRSP, and afterward use any refund of tax to clear the debt further.

Your tax bracket

If right now you are in the bracket of higher tax, it might be more important to decrease the tax you are paying than that of other people in a bracket of lower tax. In this case, in spite the charges of interest, you may need to contribute to RRSP rather than clearing your debt. Nevertheless, you may need to clear the debt now if you are expecting to be in the retirement bracket of the higher tax.

Which is better? There you have the answer now. Besides, it is advisable to do the math to see where you stand because, at the end of the day, a fine balance between what you could earn in your RRSP and what you could pay on your debt is very crucial.

Sourced from: GetSmarterAboutMoney

Image source: Thinkstock/Spotmatik

Posted on May 22, 2023