Pay down debt or contribute to RRSP

We know, many Canadians just don’t contribute to their Registered Retirement Savings Plan.  Once all of your bills are paid, you’ve signed up the kids for extra-curricular activities, helped post secondary offspring financially and spent a bit of money to have fun, there is very little cash left over to put into an RRSP.   In fact, one of the most enduring debates among financial experts is whether it is better to use extra money to pay down debt or contribute to an RRSP. 

Thinking about the following might help you to make a decision that you are comfortable with:

·         If the interest rate on your debt is higher than the return you make on your RRSP, then it probably makes more sense to pay off your debt.  This is particularly true if your debt is a high interest credit card.  This calculator, at Get Smarter about Money, might help you decide.

·         After you’ve paid off your debt, how will you spend the extra cash?  If you are not certain that the money will be put into retirement savings, a better financial decision might be to start saving for retirement before paying down debt.  However, keep in mind the point above. 

·         Do you worry about debt repayment or retirement income?  If your debt levels keep you awake at night, paying off your liabilities will make you will feel better and reduce stress. 

·         If you are in a high tax bracket and are still working, contributing to an RRSP will reduce the amount of tax owing.  But if you will be in a high tax bracket once retired, paying down debt while still employed makes more financial sense. 

This is a complex issue and there is not a one size fits all answer.  The following sites provide more information, which can help you decide what is best for you.   

http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/should-i-pay-down-my-mortgage-or-save-for-retirement/article8709241/

http://business.financialpost.com/2012/02/14/the-debt-vs-rrsp-dilemma/

http://www.talbotstevens.com/Resources/RRSPs/Releases/2011JA-TheBiggestDilemmaThisRRSPSeason.htm