Pay down debt vs tax-time savings? : Plan ahead

Think ahead and plan for next year

Many folks are heavily in debt right now – to credit cards, lines of credit and car loans, and on their mortgages and student loans. Should those of us who are carrying debt invest in RRSPs, TFSAs, and RESPs by March 1, or does it make more sense to just pay down debt?

Local experts weigh in.

BY JONATHAN GORDON BYDAND BUSINESS & TAX

For some it may be better to purchase RRSPs to reduce the taxable income for a big tax bill for the year, for others it may make more sense to pay down the mortgage or credit card debt with any extra money laying around.

The best thing for anyone who thinks they owe money is to make sure they are filed and paid by the tax season deadline to avoid penalties and interest that would add onto the debt.

For anyone who would normally owe and doesn’t want to, taking a bit extra off of each pay check or monthly incomes such as pension is normally a lot better than having a large amount owing at the end of the year. There’s never a bad time to start that as we’re already in February in the next tax year so people don’t get further behind.

When it comes to tax time, there’s still an opportunity to invest in RRSPs to reduce the current tax burden of the year. So if you’ve made a sum of money that’s substantial and would put you into a new tax bracket, it could be beneficial to invest in RRSPs to reduce your taxable income for the year.

In Canada we have a marginal tax rate meaning you pay the same amount of tax on the first tax bracket as everyone else, and only dollars earned over that tax bracket are taxed at the higher rate. So RRSPs just reduce those dollars in the higher tax brackets.

However, when you take out those contributions in retirement or in a tough time, you’ll have to pay tax on that money then.

In theory, you’ll be in a lower tax bracket when you take that money out of an RRSP. In short, an RRSP puts off when you have to pay tax on the money you’ve earned.

If people are looking for a way to have some savings for when they are retired, investing in a Tax Free savings account is a great way to make sure that any growth from either interest or investments is tax free when it’s taken out, as you’ve already paid tax on the money you’ve put in! Be warned that with both RRSPs and TFSAs that there are limits and the taxes can be quite substantial if you go over those limits! It can be hard if you have multiple TFSA or RRSP accounts at different banks to keep track of going over the limit, so it might be best to keep things all together at one bank or be super on top of your contributions!

Student loan interest can be used as a tax credit!