According to a recent CIBC survey, the financial priority for Canadians in 2019 is paying down their debts. However, a second survey reveals that 74% of respondents worry about not having enough retirement income. Many people wonder if they should contribute to their RRSPs or pay off their debts
Are you in this situation? Here are some food for thought that will help you choose the best solution for you.
Contribute to your RRSP or pay off debts?
Do you need an RRSP?
First, decide if investing in an RRSP is the right strategy for you. For example, is your income currently too low to pay tax? Will your income increase considerably over the next few years? If so, an RRSP is probably not the best option for you. Focus on paying off your debts first. You can contribute later when your tax rate is higher. This will maximize your tax refund.
Is the return on your investment greater than the cost of your debt?
The returns on your investments vary depending on the risk they represent. Let’s say your RRSP is invested in a balanced portfolio that offers a return of 6% per year. The reimbursement of your credit cards at 20% interest will be more advantageous for you!
In addition, paying off your debts will allow you to reduce your monthly payments. You can then balance your budget and avoid going into debt again. You may be able to free up an amount to invest monthly in an RRSP, TFSA or RESP.
Have your income increased significantly this year?
Worried that you haven’t had enough withholding tax collected this year? Has your marginal tax rate changed? Maybe investing in an RRSP would be a good alternative! Your contribution will allow you to reduce the tax payable.
Make sure you don’t find yourself in the same situation next year
Correct your source deductions so that they correspond to your real income. Generally, the reimbursement of consumer debts provides a higher return than that of an RRSP. In addition, the end of a monthly payment releases an amount which can then be invested. It’s up to you to choose the vehicle or plan that is most suitable for you!