Should I contribute to my RRSP, TFSA, and RESP if I have Credit Card Debt too?
Thank you for your question. It’s not uncommon to be overwhelmed by all the decisions and options to choose from this time of year. When your money is tight, it is almost if not impossible to act so you end up being frustrated and just do nothing.
Today you hear all kinds of professionals taking up one program and telling you to forget about the other as if one is better than the other. That’s just not the right answer of course as each program such as your RRSP TFSA and RESP all have special unique features plus they are all beneficial to you and your family.
First you must pay very close attention to your own debt obligations, especially those high interest credit cards and your current mortgage rate for those of us who still have a mortgage. Finally there is the RESP program which you can’t even put a monetary value on your child’s education today. That’s simply not an option to put off.
The right answer is to take care of them all!
I gather you and most everyone would if they could afford it.
So I’ll tell you a story about a client that came into to see us a few weeks back to refinance their home at the historically low rates and to lock in a 5 year fixed rate. We were able to achieve a rate much lower than they were currently paying over the previous 5 year period while keeping there amortization period – term of the mortgage at the current 20 year period down from the originally 25 year plan.
We reduced the monthly mortgage obligation by $700 and secured a lower, now fixed mortgage rate for the next five year period. On our clients NOA (Notice of Assessment) at the bottom of the second page you will notice a space that says “Available RRSP contribution Room”. In this case it was $52,000 so we added that full amount, the $52,000 into the new 5 Year fixed mortgage at the secured lower rate.
Now the client is able to make a full $52,000 RRSP contribution this year at the bank thus topping up their RRSP while reducing earned income. He will receive a tax refund for + $17,000 from revenue Canada later this year. With the 17 thousand dollar refund, they will now be paying off all their high interest + $12,000 VISA Card Debt at 19.5% – closing it and getting a new secured Visa Card with an interest rate of 4.9%. at zero card balance. The funds left over, +$ 7000 has been earmarked for their TSFA and his daughter RESP back over at their bank.
So in this case, we were able to contribute to all the government offered plans while at the same time reducing high interest credit card debt and securing a historically low mortgage rate which allows this family to increase monthly available cash. Now they can stick to a plan/budget that aims to keep debt lower so they may pay off their mortgage obligation sooner rather than later.
Everyone situation is of course different. It’s most important that you do not delay meeting with your trusted professional to see what options are available for your circumstances. It is crucial that you have the right plan in place to keep you and your family on the right path.