# Paying off debt with funds in an RRSP



## jcgd (Oct 30, 2011)

So I've been doing relatively well over the last two years increasing my net worth, but due to my current situation I haven't really been able to pay off my debt. Most of my savings are in my RRSP due to my employer matching/ stock matching while any other contributions I would make to savings head to my line of credit. I also have about $5k in my TFSA but that is inheritance that is earmarked for something significant (house, university, etc.) that I promised I wouldn't squander. Even though it's my money and the debt would be a good use, it was requested that I do something meaningful with it. Unfortunately my LOC doesn't really get paid down because my partner is in university full time so she doesn't work a great deal and we are paying the tuition in cash. We aren't married, just common law. Anyway, I get a good deal paid down on the LOC just in time for the next tuition payment. It also acts as an emergency fund so I've essentially been carrying the same amount of debt for about three years. I created the debt with pure stupidity and some bad luck when I was younger (18-22yrs). Essentially, I currently live paycheque to paycheque but my net worth does increase due to the RRSP contributions.

My question is this. What would be the smartest way to proceed with my current savings and debt?

RRSPs : $31 000
TFSA (untouchable): $5900
LOC (prime + 2.5%): Owing $14500
Visa: I don't carry a balance


- I put $400 biweekly onto the LOC but this leaves me very little to save for tuition so it essentially gets racked back up when tuition is due.
- I generally put around $100 biweekly into savings that we use to visit home once per year. We live in Calgary, family is in NS and BC.
- About $520 biweekly goes into RRSP in cash or Churchill stock. I DIY invest the cash while the Churchill stock I leave alone, but it has been slaughtered over the last year. My average price is in the low teens and the stock is currently around $7.75/share. Down about 50% or $9000k give or take.

So, I'm looking for recommendations on how I should proceed. The only thing I'm currently planning on doing is making any new Churchill stock contributions non registered so I can move it onto the debt. I set it up a few years back to go into an RRSP. At that time I had no strategy at all and it seemed to make the most sense. 

In about 2.5 years, with my partner in school I've managed to get our net worth from -$16k to about $21k so I think we are doing okay overall, but I feel like I'm being crushed by this debt. I also believe I now have the discipline to stay out of debt if I can get it paid off as it has been very slowly trending downward. We had around $5k credit card debt three years ago.

The only thing that may affect any strategy is that I may quit my job in 1.5-2 years to go to university when my partner graduates. It's not set in stone, but is a possibility. 

The two options I see are 1) withdraw funds using the Life Long Learning plan for my partner and use new contributions to repay, or simply claim the amounts as income if I return to school. 2) Wait to see if I go to school and use the LLP for myself. 3) Keep chipping away at the debt.

Please help!


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## Four Pillars (Apr 5, 2009)

It's unfortunate you have that debt, but what is done is done. At least it's not a huge amount.

My thoughts:

Use the TFSA money to pay down the debt. Never mind the issue of someone giving money with strings attached, paying down debt is as meaningful as it gets. Your call however.

You don't indicate your income level, but I'm guessing it's not super high. Moving the company rrsp contribution to non-reg makes a lot of sense, especially if it can help pay down the debt.

I'm not a fan of the llp. If you have low income years while at school, just withdraw the rrsp money and pay any tax due.

I'm sure others will mention the possibility of cutting costs/increasing income, but it appears like the situation you are in and may be in for a while until both of you are out of school is one of very low disposable income which means you won't be making much financial progress. Not a big deal - if the education investment pays off, you'll be eliminating any debt with ease and will be wondering what to do with all your money.


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## Spudd (Oct 11, 2011)

What about using the TFSA money to pay your partner's tuition next time it comes due? Would that be a worthy enough cause, or does it need to be for yourself?


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## Charlie (May 20, 2011)

you could always soldier on with the debt and chip away as you can. If your partner qualifies for student loans she could tap into those rather then boosting your LOC. Much better terms while she's in school.

Sometimes segregating your RRSP/TFSA as untouchable works best in the long term even if it doesn't make mathematical sense short term. There'll always be a reason to raid the RRSP -- but if you leave it be (and manage it) you'll get the real benefit of growth down the road.


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## jcgd (Oct 30, 2011)

Four Pillars said:


> It's unfortunate you have that debt, but what is done is done. At least it's not a huge amount.
> 
> My thoughts:
> 
> ...


Yeah, debt sucks, but live and learn... I HAVE learnt my lesson and I would say I am better than average with my money now, whereas before I was pretty terrible. Using the TFSA option is an idea, but I would like to avoid it. My main reason for this is I may be looking to buy an engagement ring in the near future and I would like to have the option of having some cash available. It's not for sure at the moment... big decision, but if I use it to pay the debt than that would be my decision.

Can you elaborate on why you don't like the LLP? It seems like my lowest cost option at the moment.



Spudd said:


> What about using the TFSA money to pay your partner's tuition next time it comes due? Would that be a worthy enough cause, or does it need to be for yourself?


Well... I'd rather spend it on myself but I suppose it's six is one, half a dozen the other. I'm paying about 2/3 of the tuition regardless, but the debt is half hers.



Charlie said:


> you could always soldier on with the debt and chip away as you can. If your partner qualifies for student loans she could tap into those rather then boosting your LOC. Much better terms while she's in school.
> 
> Sometimes segregating your RRSP/TFSA as untouchable works best in the long term even if it doesn't make mathematical sense short term. There'll always be a reason to raid the RRSP -- but if you leave it be (and manage it) you'll get the real benefit of growth down the road.


Yes, this was my original plan, because even though the debt is only decreasing slowly, my net worth is increasing at a much higher rate. The issue is having the debt when my partner graduates and I start my schooling. I doubt she will make half of what I make so I would like to cut out the $800/ month I put onto the debt. She is willing to help me with my tuition, but depending on her salary, she may not have the cash flow to do so. In that case I will use the LLP/second job to finance my schooling. Another huge reason I want to pay off the debt NOW is that I absolutely despise my job an I am literally trapped under it. We won't be able to carry it in another 1.5 years so I'd like to have it paid off by then, and I can't do that out of my current cash flow. I could stop putting money into RRSPs period, but my company matches my contributions so I'd only gain $260 per pay cheque while currently $520 per pay goes into my RRSP.

Putting my company stock in a non reg account would give me about $7k in 1.5 years. So I'm still about $7k short.

I net $4000 per month.
- Rent $1050
- Car insurance/gas $320 (Somewhat large commutes, two vehicles)
- Phones/cable/internet $155
- LOC payments $800
- Parking $100
- Food $600
- Savings $200

This leaves about $200 a week between the two of us for any other expenses that are not fixed. We are by no means doing without, but I've drastically cut our expenditures over the last two years. Most of that $200 is MY spending money, and my partner works a day a week or so and does some interesting buy/ sell stuff on the side that generates her spending money. That extra $300 per week seems like a lot, but we usually save some of it for Xmas gifts, dentist bills, etc. and we have some pets that cost a little here and there, though we've found ways to cut costs there too, by buying in bulk or from farm supply stores and such.

While my normal strategy would be to pay off the debt as best I could while continuing to save, beyond the psychological weight of this debt I really need to make it vanish within 1.5 years. I appreciate the feedback so far, and right now I'm just trying to see this from all unbiased angles before I do something stupid.


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## Tornbysaber (Nov 25, 2012)

Hey jcgd, from your post I think our age and income level are similiar. I just very recently cleared all of my debt so maybe you'd find it useful. I am not sure if stop putting money into rrsp is the best idea, because not only would you lose the match you'd also have to pay more in tax. So the 260 you "gain" would be maybe 200 in the end.

Jan 2011
RRSPs : $0
TFSA : $5000
LOC (prime + 2.5%): Owing $22000
Car loan (I was young and bought a new car): Owing $8000 
Other investments (this was started when I was 15): $15000 

Dec 2012
RRSP: $20,000
TFSA: $1000 (ya i lost big here)
LOC : paid off as of Dec 10th, 2012
Car loan: paid off as of August, 2012 
Other Investments: $25000 ish, i am not really sure.

I pretty much just chipped the debt away, the money in my day to day bank account didnt increase much so you could say I was living paycheque to paycheque. Like you I paid more than my half of the bills but I really feel you are trying to fund 2 people with 1 pay.


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## Spudd (Oct 11, 2011)

I definitely think you should keep contributing to the RRSP to get the company match. That's free money. 

Money saving ideas:
- do you really need 2 cars? Could the partner who's in school make do with public transport?
- 155 for phone/cable/Internet seems high. If you're paying for a land line, what about getting VoIP? Why pay for cable when most networks have all their shows free to watch online now? Cellphones- any chance to reduce the monthly plan to a lower level or switch to pay as you go if your usage is low?

If at the end of the 1.5 years when you go back to school it's still not paid off, you can pay your tuition with the TFSA (assuming you decide not to put it against the debt before then) and have your partner take over the LOC payments with her new salary. Once you quit your job, if your partner's salary isn't enough, you can withdraw from the RRSP at that point since your income will be low and the tax bite will be much less. If you withdraw now to pay the debt you'll pay the full marginal tax sine it counts on top of your current income.


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## Four Pillars (Apr 5, 2009)

jcgd said:


> Using the TFSA option is an idea, but I would like to avoid it. My main reason for this is I may be looking to buy an engagement ring in the near future and I would like to have the option of having some cash available.


You have to be kidding. You can't afford it. Just buy something supercheap and tell her you'll get her a nice rock once your married finances are settled. 



jcgd said:


> Can you elaborate on why you don't like the LLP? It seems like my lowest cost option at the moment.


This article explains it http://www.theglobeandmail.com/glob...es-the-lifelong-learning-plan/article4327279/




jcgd said:


> this debt I really need to make it vanish within 1.5 years.





jcgd said:


> ...So I'm still about $7k short.





jcgd said:


> TFSA (untouchable): $5900


Hmmm...it's a mystery alright.


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## jcgd (Oct 30, 2011)

Mike, I think you are right about the LLP and the TFSA money. I have to think about this some more. About the ring, you are right. I've decided to use my 3rd paycheque this month, of which I require no funds for bills, to pay for the ring in cash. My gf said she will be happy with anything (of course) but she doesn't want to upgrade later. I thought about it and she still has seven more fingers I can bling up down the road.

If I understand correctly, the wise move would be to pay off the $5900 immediately. Then take any new company stock in a non-registered account which I can use to pay down the remainder. If I am still short in 1.5 years and do head back to school I can do a RRSP withdrawal and just pay tax on my non existent income. Losing the small amount of contribution room will probably not matter over my lifetime. I don't expect to ever be able to max out my contributions. If I do use the LLP now I risk having to pay the money back in a higher tax bracket later as some of my RRSP contributions were made in lower tax brackets while I worked through my apprenticeship. 

Thanks for the advise guys. I can always count on the people here!


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## KaeJS (Sep 28, 2010)

1) You make twice what I make. I net $2k/month

2) My net worth is $71k and I have no debt.

3) I am also younger than you.

4) In terms of expenses geared to income, mine is higher than yours.

*jcgd,* not to be rude - but you should try to evaluate your spending habits and your income. That is where your problem lies.

And to be honest, I would have to agree with Mr. Holman. Forget about the ring. Engagement Ring = Money. Celebrations = Money. Wedding = Money. You will have more than enough time to do all of this in the future. In fact, if you pay debt down now, you can do MORE of that in the future. (because you will have more money instead of giving it to the bank!)

--------

Apply TFSA to LOC, continue stock contributions in non-reg, re-evaluate spending. 

Also, I'm sure you could cut $50-100/month from your food budget. $600 is a lot for just two people only. I live on $200/month for food, and feeding 2 is cheaper than feeding 1. So, there's no reason you can't survive on $500 of food. Just don't buy stupid stuff like beer or peanut butter.

Your partner only works one day a week. You may want to consider telling your partner to work more, such as 3-4 days a week. When I was in college full time, I worked full time, as well.

Pets will always be a drain on resources.

I think you need to just bite the bullet and become a hermit for a few months while you tell your partner to work more. I don't think I could be in a relationship where my partner only works one day a week. That is not enough. School does not consume that much time. Obviously full time is a bit much, but a couple more days here and there would do you all some good. Maybe you should just have a nice chat over cheap dinner (Mr. Noodles) about your financial situation.

I'm against the LLP, also.


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## jcgd (Oct 30, 2011)

Yeah, not much is going to change with my budget because I am perfectly happy where I am. It's hard to compare you to me, Kae, because our values are very, very different. From what I can gather, and I don't mean to be offensive, you value money over most everything else. I value money to the point where I rely on it and no more. I buy what I want, minus a bit due to thinking twice about things I don't need, and eat what I want. I love food, so I spend big on it. I save what I think I will need for later, and then a little bit. But I don't see the point to saving more than I will ever need. It would be nice to hit the rich threshold one day, but don't see any point in being very rich. The money would gather dust. So unless I land a job where I will get paid so much I become rich I don't really have it set as a goal. I just don't see the value to money beyond the ability to buy what I want. My enjoyment comes from very simple things that are generally afforded on a modest salary.

Now I agree, the debt is completely uncalled for. But alas, I screwed up before I knew any better and it won't happen again. 

School is a tough subject. The hit her school marks take in order to work more don't justify the added income. It kills me that she goes to work for $13/hr as it is. Her time is better spend doing almost anything else and it is very important to keep her grades above a certain threshold. She worked more in the first two years of university when the work load wasn't as demanding but the money was used for my schooling. Now that the courses are becoming more difficult she needs to maintain a certain grade to continue towards her goals. I'm not willing to sacrifice the opportunity for a measly $250 a month. 

My only issue with any of my current finances and relationship is the debt. So I think you nailed it with possibly becoming a hermit. If I do so, we may be able to unload the debt within six months and resume our current lifestyle, which I'm happy with. 

Also, Kae, the engagement ring is something I want to do for her. It's something I value personally, and something I would like to do for the love of my life. There are worse things I could waste money on that would provide as little perceived value. No celebrations for elaborate wedding for me though. When we do get married, in many years, it will likely be a cheap destination wedding. Something both of us want, and we get a sweet vacation/ wedding/ honeymoon all in one. I would trade every dime I've ever made, plus every dime I'll ever make if it meant I could spend my life of poverty with her. Our happiness is the end result of everything I do, and it might seem insane to someone else, but an engagement ring is a small gesture that bring me, personally, a lot of joy and pride.


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## KaeJS (Sep 28, 2010)

No offence taken. :encouragement:

You are right. It's all about priorities. Everyone has different priorities.

If something makes you happier than paying off debt - then don't bother with the debt.

I wish debt didn't bother me. I would go buy myself a new car right now.. :biggrin:


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## jcgd (Oct 30, 2011)

Haha, debt does bother me. And I absolutely appreciate the feedback and different viewpoints. I am just looking specifically for advise on how to take my surplus funds, and current assets and maximize the value. Obviously what I have going isn't the smartest method, but while I was developing disipline it seemed like the best route for me. I mean, I went from being in the hole to a positive net worth in a few years. And what I was doing before then obviously wasn't working for me!

I'll have to re-evaluate and see where I can trim the fat, but my current setup is one I am happy with IF I can eliminate the debt, so Kae, I think you are right. It seems the best way forward would be going cold turkey and hermit it for six months or so to crush the debt and then we can come back to our current lifestyle and have no issues. I just don't have any interest in cutting expenses any further for a permanent basis. It'll get to point where I'm living, but not enjoying my life.


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## randomthoughts (May 23, 2010)

KaeJS said:


> 1) Just don't buy stupid stuff like beer or peanut butter.


Wait, what's wrong with peanut butter? With whole wheat bread, it's a cheap complete protein! And delicious!


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## KaeJS (Sep 28, 2010)

randomthoughts said:


> Wait, what's wrong with peanut butter? With whole wheat bread, it's a cheap complete protein! And delicious!


It's not that cheap..... it's like $5/jar :hopelessness:

That jar doesn't last too long and it's not very filling....


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## Plugging Along (Jan 3, 2011)

Jcgd: I do think that paying off debt is the way to go. Essentially, you are getting no value fork your money by paying interest.

I do think that $600 is really high for two people. I have three adults and two kids, and and spend about $1000 -$1200 a month on groceries. That's eating really well with seafood, gourmet spices, fresh fruits and veggies, AAA beef, etc. I also live in cowtown, so I think the amounts are a fair comparison. Just so you know, when my souse and I weren't working we got our groceries down to $450 amounts, that was a lot of work though.

I have actually found my grocery budget was one of the area that we learned to manage a lot better, and it sticks with us now. 

And peanut butter is great, just get it on sale or in the large jars.


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## Eclectic12 (Oct 20, 2010)

KaeJS said:


> It's not that cheap..... it's like $5/jar :hopelessness:
> 
> That jar doesn't last too long and it's not very filling....


Hmmm .... I'll have to find my receipt ... I think I paid about $7 for the 1.1 Kg tub that lasts for what seems like forever.


Cheers


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## Koala (Jan 27, 2012)

Has your partner applied for any interest free loans (as long as she is a student) that she can get? At least you wouldn't be racking up your LOC and paying the interest one top of that every time tuition had to be paid.


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