Basics, Wellness

Using RRSP to pay off debt

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RRSP vs TFSA – The overlooked debt saving strategy.

Debt and savings go hand in hand. Often, we save money to pay off debt, or we avoid going into debt by saving money in the first place. Below we dive into a strategy that is often overlooked:  How to use your RRSP’s to reach savings and debt payment goals.

To be clear, this doesn’t mean using the funds in your RRSP’s to pay off debt…because that’s often an unwise move when it comes to longer-term planning.

Putting money aside for savings is one part of the equation, but we never think of how best to deploy those saved funds to get the most bang for our buck. This is an area where strategy and wisdom pay off!

There are a lot of cases, or life events, where we want to save up some money.

Most people know they should have some funds saved, but don’t always get the best advice on how to achieve those saving goals.

Whether you have a specific goal you are saving for, or you simply want to get into the habit of having funds saved, there are two important steps in the process. The first is the act of saving, and not spending, a portion of the funds you are earning. The second is taking that chunk of savings, and making the most of it achieve your saving goals.

Below is our favourite strategy for putting your savings to work – aka, the second chunk.

There are many debates about RRSP’s and if they are suitable for individuals or not. We find that most people forget that RRSP’s allow you to meet your savings goals while still accessing lump sum cash in the form of the cash refund! Therefore, contrary to what you may have heard,  RRSP’s give you access to cash flow!

For example, if you’re saving up for a new baby on the way, spend the time of the pregnancy (or earlier if you can!), contributing as many funds as you can into your RRSP and using up the free RRSP room you may have from previous years. This is an especially good time to do so, as your work situation may change after you have a child.

You can then use the tax refund you obtain from those refunds in order to bridge the gap between your EI earnings and what you were previously earning. Also, the other key factor is remembering that when you withdraw from your RRSP while you are on EI, you are doing so at a lower tax rate, meaning you are getting more bang for your RRSP buck! This also helps you access funds at a cheaper rate than other debt options. Those baby expenses add up, and if you’re going into debt to fund them, you may want to consider alternatives.
Another way to benefit from the RRSP structure is to withdraw funds from your RRSP while you are on EI and earning less, pay the lower tax rate, and then re-contribute these funds into your spouse’s RRSP. The difference between your two tax rates becomes your free money at refund time!

Utilizing the RRSP is a way to stretch a dollar and give yourself a bonus for saving and planning well. It’s not too difficult and can make a big difference!

Maybe you are planning to get married or start a family, or maybe you are hoping to head back to school.

Finally, if you were considering going into debt to finance a new home or to go back to school, your RRSP’s are there for you again!

Click here to see how a family used this strategy to get out of debt fast.

Click here to learn more about how RRSPs can work for you.

Do you contribute to your RRSPs right now? Let us know in the comments below!

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