Q&A: Struggling with Debt

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A reader has been contributing a lot of money to his RRSP to save taxes but now the debt load is starting to be worrisome


Q – I am 54 years old with an income of $80,000. My workplace takes little tax from my pay ($10,000 only) so for the last couple years I have contributed $20,000 annually into my RRSP, trying to catch up and at same time reduce taxes. I currently have about $280,000 in the plan. At year-end I usually still owe a couple thousand in additional taxes.

‪My budget is extremely tight due to the RRSP! I have been thinking maybe I should reduce the RRSP contribution and pay more in taxes to help free up some funds to pay down bills such as the mortgage ($220,000) and $50,000 credit line. The way things are going the credit line will never go away. I have managed to double up on my mortgage payments and my goal is to retire without a mortgage or come close. Any suggestions? – Ken R.

A – I rarely advise people to pay more taxes – it goes against my grain. However, in your case it may make sense because of your debt load. For starters, you can ask your employer to withhold more tax from your pay so that you don’t end up with a large bill at year-end. All you’ll have to do is to fill out a form making the request. Your take-home pay will be reduced but you won’t have to worry about having money to pay the Canada Revenue Agency when tax time comes around.

Once that is done, focus on paying off the credit line – the interest rate on it is probably higher than on your mortgage. You have a fairly sizeable RRSP so it won’t be the end of the world if you don’t contribute for two or three years. Once the line of credit is paid off, resume your RRSP contributions. If you end up with a tax refund at year-end, direct it to paying down the mortgage. – G.P.


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