Q&A: Inheritance dilemma

A reader has inherited a large sum of money. Should he pay down debt or make a RRSP contribution or do something else? Gordon Pape has some suggestions.

Question: I recently received an inheritance of about $200,000 in cash. I am wondering whether to pay down debt ($60,000 line of credit) or invest it in RRSPs and use the tax refund to pay down the line of credit. I am 61 and closer to retirement than I would like to think. Which is the better investment, the RRSP for a large tax refund or paying down the debt? (I have room for about $100,000 in RRSP contributions). – Dave M.

Gordon Pape answers: Certainly, you should aim to go into retirement debt-free. However, in this case you may be able to eat your cake and have it too. Your idea about making an RRSP contribution and putting the refund towards paying off the line of credit makes a lot of sense.

Of course, the size of the refund will be determined by your tax bracket. The inheritance will not be treated as income (it’s tax-free) so your marginal tax rate will depend on your other sources of income. The higher it is, the larger the refund you will receive.

Keep in mind that once you have reduced the tax payable to zero, you will have to defer claiming any additional deductions until future years. That is perfectly legal – you can get the money working for you in the RRSP and then claim the deductions each year until you have used up the full amount.

You only have $100,000 in RRSP room right now so what are you going to do with the rest of the money? You could use that to pay down the loan immediately and put as much as $25,500 into a Tax-Free Savings Account, if you haven’t opened one already. If you have a spouse that does not have a TFSA, you could give some money to her to do the same.

In short, you have several options. Just be sure that, one way or another, that $60,000 debt is eliminated before you stop work.

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