Be wary of saving in an RRSP at the expense of debt

When Patrick French was about 18 years old, he got a hot tip about a gold mining stock.

TORONTO — When Patrick French was about 18 years old, he got a hot tip about a gold mining stock.

The problem was he was a student with no money, but he still wanted to cash in on the “can’t miss” opportunity for his RRSP.

So, he took out a $4,000 loan.

“I broke some fundamental rules for what was promised to be a brilliant idea,” said French, director of retirement and financial planning at investment firm Edward Jones.

“Within 12 months, the stock was effectively worthless. It was one of those things where at the time, it was a very expensive lesson — invaluable really.”

Not only did French lose his investment, he lost his RRSP contribution room. He also now had more debt.

Today, French tells clients more often than not, it’s a bad idea to incur debt, or ignore debt, to invest in an RRSP.

“You have to believe that you can consistently earn a higher rate of return than you can by paying down the debt,” he said.

“That’s why regardless of your age, paying down your debt is always a good financial strategy.”

As the March 1 deadline looms for RRSP contributions this year, many Canadians will be thinking about how much they want or are able to contribute to their retirement savings.

French says there’s bad debt and good debt.

An example of bad debt is credit card debt, which often carries an interest rate of 20 per cent. Mortgage debt, on the other hand, could be considered good debt, if interest rates continue to stay at current historic lows.

As a general rule, it’s a good idea to tackle bad debt first because any tax savings you may receive from an RRSP contribution will likely not exceed the interest costs a credit card company charges.

Financial adviser Sara Zollo believes in a slightly different school of thought. She encourages her clients not to neglect their retirement savings just because they have debt.

“One of the biggest mistakes you can do is ignore your savings and just pay down the debt,” said Zollo, who works at Sun Life Financial Canada.

“It is a good idea to do a combination of both and to look at each individual situation and decide what ratio goes to debt repayment and what ratio goes to savings.”

Even putting aside as little as $20 a month is enough to help kick-start an RRSP.

“I can’t tell you how many times clients are surprised with how much money they have put away by the end of the year,” she said.

Zollo says putting money away in an RRSP may also be advantageous for those in a high income tax bracket because it creates a deduction on the amount of taxes that are owed.

“If you can minimize taxes paid down today, you have more money today,” she said. “With the refund, you can put that towards your debt, and then you’ve done both — saved in your RRSP and paid down some of your debt.”

But like with any major financial decision, Zollo says it’s best to consult with a professional first.

“A written annual financial plan can look at budgeting, tax planning, retirement planning, kid’s education planning, protecting your savings and proper insurance,” she said.

Just Posted

Campaign renews push to make Bighorn Backcountry a wildland provincial park, ATV groups unhappy

A push to provide provincial protection for the Bighorn Backcountry area has… Continue reading

Flu cases steadily climb in Central Alberta

So far the number of Central Albertans admitted to hospital with the… Continue reading

CP Holiday train makes stops in Central Alberta

The popular train will feature entertainment from Colin James and Emma-Lee

Auditor general flags Royal Military College for costs, cadet behaviour

The Royal Military College of Canada has taken another blow to its… Continue reading

After death of 8th child, Ikea relaunches dresser recall in U.S and Canada

NEW YORK — Ikea relaunched a recall of 29 million chests and… Continue reading

VIDEO: Replay Red Deer: Nov. 19

Watch news highlights from the week of Nov. 13

Update: Innisfail girl found

A 15-year-old missing Innisfail girl has been located safe and sound. Police… Continue reading

Red Deer Christmas Bureau to help 1,300 children this year

Demand is high, but Red Deer always provides

CP Holiday train makes stops in Central Alberta

The popular train will feature entertainment from Colin James and Emma-Lee

Kittens rescued after allegedly being tossed from vehicle

Couple finds abandoned kittens new home through Facebook

VIDEO: ‘Party bus’ goes up in flames in Vancouver

Fire crews responded to the late night blaze

Chicken crosses B.C. road, stops traffic

Rooster makes early morning commuters wait in Maple Ridge

Red Deerian honours her brother who died in a motorcycle collision

Houaida Haddad is encouraging Red Deer residents to donate blood

Most Read


Five-day delivery plus unlimited digital access for $185 for 260 issues (must live in delivery area to qualify) Unlimited Digital Access 99 cents for the first four weeks and then only $15 per month Five-day delivery plus unlimited digital access for $15 a month