# Pay Off Car or Invest in RRSP



## billybilo (Jan 17, 2013)

Hi Folks,

Hoping for some input on my situation for tax season - trying to decide whether I should put my money into an RRSP, or put the money towards my car loan.

Income: $117k
Car Loan:	$28k @ Floating Prime (3%) - amortized over 5 years
Cash:	$13k 

I carry no other debt, nor do I have any savings/investments, aside from a small amount in a company matched RSP. I’m currently renting.

Were I to put the money against the vehicle plus monthly surplus cash, I expect I could have it completely paid off by the fall, if not sooner.

As far as tax deductions/returns go, 

-	Moving Expenses - $6k
-	CPP and EI overpayment - $2.5k (switched employers) 
-	$2.5k into a company RSP

I’m 31. When my income was lower, the better approach would have been to pay down the car loan. However, due to my high marginal tax rate, an RRSP is looking appealing. I'd invest in a self directed TD E-Series RRSP.

Any thoughts?


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## marina628 (Dec 14, 2010)

Car loan is only 3% I would do the RSP and any excess you have apply that to the car to get it paid off sooner.


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## marina628 (Dec 14, 2010)

Not going to work a budget for you but if you pay $1200 a month the car is paid off in 2 years ,you earn good money so I would try to get rid of that debt.


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## none (Jan 15, 2013)

No Brainer - RRSP and put the refund either into a TFSA or use RRSP 'refund' to pay off your car loan if that makes you feel better.


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## andrewf (Mar 1, 2010)

Paying off the car loan is like having a 5-6% GIC. That's a pretty good deal...


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## CanadianCapitalist (Mar 31, 2009)

I concur with Andrew. OP is in a 50 percent tax bracket. Paying down the car loan earns a guaranteed 6 percent after-tax return. So, it won't be a bad choice either.


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## Sampson (Apr 3, 2009)

do both. rrsp benefit is significant, and car loan is pretty high rate. put 50% of effort into the car loan, and 50% into rrsp.


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## marina628 (Dec 14, 2010)

ok I am first to admit tax is not my strong point but if op is in 50% tax bracket wouldn't that savings be far better than saving the interest on the car loan?If he can put in $28,000 rsp ,wouldn't that save him $14,000?Again just asking and maybe I will learn something in the process


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## jcgd (Oct 30, 2011)

50% until he drops an income bracket I think. And then any contributions over that will be under the next bracket, and so on.


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## Hawkdog (Oct 26, 2012)

link for calculating RSP return
http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2011-RRSP-Savings


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## andrewf (Mar 1, 2010)

Marina, he can get that $14,000 by contributing next year. In the mean time he has given up to opportunity to make 5-6%% guaranteed pre-tax equivalent. So he's not 'losing' the $14k by not contributing now. He's foregoing any investment return he may have made on the $28k he might contribute. In which case, 5-6% is a pretty good return.


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## Hawkdog (Oct 26, 2012)

How much RRSP room do you have? 

+1 for putting into RSP and then putting refund on Loan.


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## uptoolate (Oct 9, 2011)

All good advice. The bigger question I would have is why does someone with an income of 117k have a car loan? I understand that you might just have arrived at that income level but if you have no other debt and you are renting, how long would it have taken to save the money and pay cash for the car? At some income levels and in some situations, we are forced to take on debt but in others we chose do it unnecessarily to the great benefit of the banks. At 31 with your income, I would probably fund the RRSP and put the refund on the loan and then pay the loan off as quickly as possible. And I am talking quick - with the knowledge that I maybe shouldn't have taken the loan in the first place! 

At 117k, he's not in the top tax bracket.


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## peterk (May 16, 2010)

How was it determined OP was at 50% tax bracket? Should only be 43 if in Ontario.

Not that it makes too big a difference in this situation...


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## kcowan (Jul 1, 2010)

Hawkdog said:


> How much RRSP room do you have?
> 
> +1 for putting into RSP and then putting refund on Loan.


+1
Even at 43% tax it would be worth it.

I suspect the car loan was one of those dealer spiffs. Hard to pass up unless you can get a comparable discount on purchase price.


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## Eclectic12 (Oct 20, 2010)

andrewf said:


> Marina, he can get that $14,000 by contributing next year.
> 
> In the mean time he has given up to opportunity to make 5-6%% guaranteed pre-tax equivalent.
> 
> So he's not 'losing' the $14k by not contributing now. He's foregoing any investment return he may have made on the $28k he might contribute. In which case, 5-6% is a pretty good return.


Agree that it not "losing" but there are a lot of other factors. For instance, it's less than a $14K tax refund in the short term, unless something fancy like an RRSP loan is done. The way I read the post, there is a maximum of $13K in cash available now plus whatever excess cash flow that can be put into the RRSP before the March 1st deadline. 

After the deadline, excess cash can optionally be put into the RRSP - but in the worst case, the tax refund won't be available until 2014 as a lump sum or if the T1213 "Request to reduce tax at source" is filled out, the tax refund will be earlier but spread across the year as income is paid (which will require attention/discipline to make sure it is applied to the car loan).

At first glance, the guaranteed pre-tax return doesn't sway me either way given that there's lots of stocks that pay 5% just in dividends that would be tax deferred in an RRSP, with any capital gains as a bonus.

Also there are the tax deductions that would factor into this year and may/may not be available in future years. This should mean that whatever amount being contributed to the RRSP this year has a better chance of reducing income to the point of dropping a tax bracket.


So I'd calculate a few options paying attention to when the tax brackets are changing but would be investigating closely putting the available cash and excess cash flow into the RRSP until the deadline and then switching over the excess cash to paying off the car loan. When the tax refund comes it, it can also be applied o the car loan. 

This way, some RRSP money has a longer growth period in the RRSP and when the refund is going to be delayed/spread out, the car loan is being paid off.


At the end of the day, either option or a blend of the two is going to be a benefit compared to just plain spending the money on entertainment etc.


Note that I'm assuming an appropriate emergency fund is kept aside to avoid having to withdraw from the RRSP. Since the car loan is a priority and credit seems easy to come by, I'd keep the emergency fund to a minimum until the car loan is paid off.


Cheers


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## andrewf (Mar 1, 2010)

I think it's pretty close to the indifference point. 

The answer to his question is yes. Pay off loan AND contribute to RRSP.


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## billybilo (Jan 17, 2013)

Great input! I really appreciate all of your answers.

To address a couple of the questions,

- Around 40k in available RRSP room.

- The reason for a car loan at my income level is I just squared away my $65k of student debt. Also, my income level only recently bumped up.

- _The way I read the post, there is a maximum of $13K in cash available now plus whatever excess cash flow that can be put into the RRSP before the March 1st deadline. _
* This is correct

- I'm in Alberta, so that $13k is only getting hit at a 36% marginal rate.


I get the sense that it's pretty close either way? My personal preference is to pay the debt off first. I just want to ensure there isn't a significant loss by foregoing the RRSP.


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## marina628 (Dec 14, 2010)

I was interested in this for myself as well.I have about $43,000 in unused RRSP room but I never bother to fill it up as I am working on paying off the mortgage.Because of my high disability tax credits and high medical bills ,I always manage to get myself down in the $39,000 or less tax bracket .I know I will earn more money later in life than I do now as I have several rental properties that will increase my taxable income significantly in next 5 or so years.


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## uptoolate (Oct 9, 2011)

Don't forget Marina that you can make the RRSP contribution now to take advantage of the tax free growth and make the claim for the deduction in later years when you have significantly higher income or less in the way of deductions.


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