Investment season — Paying off debt “always a good investment,” financial planner says

Hey there, time traveller!
This article was published 12/02/2018 (2865 days ago), so information in it may no longer be current.

While many people seem to be clamouring to submit their RRSP contribution in time for the March 1 deadline to impact their 2017 tax return’s bottom line, others are justifiably avoiding RRSPs altogether.

On that front, it’s not even advisable for everyone to begin setting aside money for their retirements.

It’s a complex issue, which Premier Financial certified financial planner Brian Cottom deals with on a daily basis.

There are countless misconceptions, and he said that it’s easy to be led astray by the many nuances that surround finances and taxation, which lends to the importance of getting sound advice from a trusted source.

Blanket advice only goes so far, he said, with everyone’s financial situation being unique.

Before figuring out where you should place your retirement savings, Cottom said the first hurdle is reaching a financial state where setting aside money for retirement makes sense.

Those with debt should pay it off before tackling retirement savings.

It has become easier than ever to incur debt, Cottom said, adding that when he was young the only way to spend money was to physically go to a store.

Now, people can pull their phone out of their pocket and within a few minutes use a credit card to order something online.

Even so, Cottom said that the temptation to spend money, even back in his day, was a difficult thing to overcome.

Cottom’s means of overcoming this temptation was by setting money aside each paycheque into an investment — which he called a “forced savings” — he was unable to withdraw money from on a whim.

With greater forethought before he made purchases, he ended up making fewer purchases.

“On the debt side, you know a couple of sure things,” he said. “You know what the balance is, you know that if you put money against it, that balance will decline, and you know what the interest rate is.”

Paying off debt is a guaranteed investment in one’s self, he said, adding that this is “always a good investment in my books.”

Once debts are taken care of, retirement savings should commence, during which time the question of RRSPs and TFSAs will be the first hurdle.

Where RRSP contributions are deductible from income for tax purposes, TFSAs are contributed after taxes have already been paid.

It’s not that RRSPs are tax-free altogether, which Cottom said is one of many common misconceptions that surrounds them.

Much to certain retirees’ ire, when RRSPs are withdrawn, the amount taken out is added to one’s annual income and contributes to that year’s income taxes.

TFSAs have already been taxed, meaning no matter how much interest they generate over the years and when they are withdrawn, they will never again be subject to taxation.

Retirees’ annual income is typically of a lower level than when they were working, meaning that when they finally withdraw RRSP funds, they are likely to be taxed at a lower income bracket than they would have been previously.

While RRSPs make sense to those of higher income tax brackets, those in the first federal tax bracket (annual income up to $45,916) would be better served by use of a TFSA, since they are already being taxed at the lowest possible federal rate.

Once one has decided whether an RRSP, a TFSA or a combination of the two is their avenue of choice, the next big decision will be to decide what investment stream they’re going to use to incur interest.

This topic will be explored in next Monday’s Retirement Savings Plan feature.

» tclarke@brandonsun.com

» Twitter: @TylerClarkeMB