Pay down your debt or increase your savings? As you’ve learned throughout Savings and Debt, there are many considerations, plus a couple more we haven’t addressed yet.
"Free money" could mean that derived by contributing to an RESP to get a CESG or contributing to your employer’s pension or savings plan to get a matching contribution or price discount. Either way, it is to your benefit to take advantage of any such opportunity.
Compare your debt financing (interest) costs against your investment rate of return. Which one will net you the biggest return after taxes? Use RRSPs when there is a tax advantage. Compare your current and likely future marginal tax rates (MTRs).
An RRSP tax refund today will pay off, if your tax rate when withdrawing the money is lower—the larger the spread, the greater the advantage of using an RRSP. For example, Laria and Angelo each contribute $10,000 into their RRSPs. Compare the tax refund today against the tax paid when the money is withdrawn at retirement.
|
Laria |
Angelo |
---|---|---|
Current tax rate |
40% |
25% |
Tax refund |
$4,000.00 |
$2,500.00 |
Future tax rate |
25% |
25% |
Tax paid when withdrawn |
$2,500.00 |
$2,500.00 |
Tax saved |
$1,500.00 |
$0.00 |
Planning the right strategy depends on your situation. For each of the following circumstances, there is an appropriate plan:
Which is better? An RRSP or a TFSA? A personal or spousal RRSP? It depends on your marginal tax rate. Find out how. Click the button below to start.
BeginPaying off debt and saving to achieve future goals: both are good things to do. Your financial stability (that is, your job security, your amount of debt), your assets and the size of your debt payments compared to your income, all play a part in deciding which is better. However, beyond the numbers, you have to be able to sleep at night, comfortable with your decision. Your emotional and your rational sides have to agree on the most appropriate path for you today.
Tomorrow is another day. You may need to change your priorities. That is why it’s important to review your debt-savings decisions annually and whenever a significant change occurs.