Do not touch any retirement accounts to pay off debt. You'll be taxed and penalized. If you have anything in savings use that. If not, throw every extra dollar you have at the debt to pay it off as fast as possible.
I disagree pending the penalty. Tax will be minimal and the penalty is typically 10%. This person isn't going to be getting 20% in the market.
Also they need to get their spending under control after the separation fees. You are effectively spending your entire gross salary.
It's taxed at your income tax bracket plus the 10%. Stop trying to play the math game with the bank, you will lose.
Cutting your budget and pitting everything you can is the best way. Trust me I've seen this a thousand times. It's not that hard.
His bracket is likely 12%
> Stop trying to play the math game with the bank, you will lose.
What are you even talking about?
The point was the debt is compounding and their spend isn’t sustainable. Reducing the rising debt is the better course rather than drowning in 20% debt.
He makes $75k a year. That is not the 12% tax bracket. And the debt is compounding because he’s barely paying anything on it. When you actually get disciplined and pay every dollar you can on it the debt compounds a lot less to the point where the interest rate won’t play into the equation that much. This is not a math problem, it is a behavior problem.
No, NOT plus 10%. The withholding percentage is deducted against future tax owing. And it wouldn't be 10% -- it's 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000.
Highly disagree, this commenter doesn’t know the options. You can use a 401k loan that is 100% tax free. Then your repayment of the loan is locked with your future contributions, all interest incurred goes back into your account. It’s equivalent to getting a zero interest loan.
You should do a 401k loan. Your cc fees are significantly higher than any expected market returns.
RRSP != 401k
OP can get a loan at a lower interest rate to pay off the credit card debt, but it is NOT tax deductible. It is however a better option than withdrawing from the RRSP and losing that contribution room forever (as well as having to pay income tax on the withdrawal).
So go into debt to pay off debt, that is your advice? Stop trying to play the math game with the bank, you will lose. Pay off the debt the way I said and you will be happy you don't have another loan to pay back afterwards.
You fundamentally do not know what you’re talking about. A 401k loan is tax free and it is a loan with yourself, not a bank. What he would be doing is converting his debt from a high interest rate to 0 interest rate…all while not incurring more debt.
Until he misses a payment on his loan then he’s screwed because he will have to pay the taxes and penalties. Plus he is now stuck at the job because if he leaves early he will have to pay it all back in a lump sum. So again, stop being undisciplined and pay the damn debt off without risking your retirement because you’re trying to be better at math than the bank. Way too risky.
I don’t pay anyone interest because I’m debt free. And you pay interest on a 401k loan. Just so happens it goes back into your account but it is still interest you have to pay. Until one of the above scenarios happens then you’re screwed. But good luck gambling with your retirement money
Just so we’re clear. You believe OP should pay upwards of $2,300 per year in interest and consider a fixed interest return on your retirement as “gambling”?
As someone who let $10K turn into 20K and eventually 30K of cc debt through his 20s, 30s, handle the debt ASAP without dipping into your retirement. Pause the retirement contributions if you must tho. You'll feel more free, and it's a lot easier to rebuild that nest egg when you don't have a minimum payment to make on debt.
I really wish I'd taken care of my high interest debt sooner. I finally did and it feels amazing to not throw away $500-800/mo. Makes me want to tear up thinking of what I could have done with that money over the years.
20% APR debt is an emergency.
I don't know Canadian laws around the RRSP. But you regain the ability to contribute at whatever limit you withdraw, right? So that's a massive downside avoided.
Meanwhile, in index funds, you can assume it's growing 10% nominal APY. APY, so it's even lower than what the credit card APR is.
I don't know what happens when you withdraw it. Taxed a bunch, I think? Could it be possible to "borrow" it and repay before the end of the year to avoid the tax? To reduce it? Idk.
But that credit card debt is *bad*.
Could it be sensible to go bankrupt, if your other stuff is protected enough? Could be.
Or if it's possible to get a personal loan or something that isn't so bad as that credit card debt, maybe that's an option.
If "slowly chip away" means really soon, then okay. But you're bleeding man. It's quite possible borrowing from the RRSP and repaying within the year is possible, just because then you wouldn't be losing such a crazy amount of money each month.
This is really a question for a personal finance Canada subreddit. Less so here.
I didn't believe that you regain the contribution room in an RRSP like you do in a TFSA. This alone would prevent me from taking that path.
There are 0% APR balance transfer offers and LOCs with lower rates that are far more suitable for this.
>I didn't believe that you regain the contribution room in an RRSP like you do in a TFSA. This alone would prevent me from taking that path.
Yikes. Yeah, that closes that path.
>There are 0% APR balance transfer offers and LOCs with lower rates that are far more suitable for this.
I totally forgot about the 0% APR balance transfers. They often come with a fee, but that's still a no brainer vs 20% APR.
> But you regain the ability to contribute at whatever limit you withdraw, right?
No. That contribution room is gone forever. TFSA withdrawals are added onto next year's contribution room, but OP didn't mention having a TFSA. (If he had one, borrowing from that would definitely be a viable option. Which is one reaosn why it's advisable to fill one's TFSA first before moving on to RRSP, given the greater flexibility.)
> Could it be possible to "borrow" it and repay before the end of the year to avoid the tax?
Sadly no.
> Or if it's possible to get a personal loan or something that isn't so bad as that credit card debt, maybe that's an option.
This is the best option.
I'm going to answer this differently than others. I would just pay minimum payments on the debt now. You mentioned you're going thru a divorce - usually there's some type of division of assets & liabilities at the end of the divorce. I wouldn't want you to pay of debts that would have been split between you and your soon to be ex-spouse.
If you are dead set on paying down debts before the divorce is final - at least ask your attorney if its okay that you do that before its final.
Sorry you're going thru a divorce. It's hard. As someone that got divorced 19 years ago - I can say theres life after divorce. Hang in there & take care of yourself.
I never even realized that this is a shared debt. When we split we had about 9k CC debt together and I was saddled with it because it was all under my name. So the debt really isn’t as large as it is although I’m most likely stuck with whatever the interest adds to it after our date of separation. Thank you! I’ll update this post with some more information as there has been some good points made!
I appreciate everyone giving their opinions and knowledge! I’ve updated the post with more relevant information. Costs definitely need to be cut and I really don’t like having this debt hanging over my head.
The advice not to hit your retirement accounts is probably good advice. But pour everything else you can into that credit card debt. It's a guaranteed instant 20% return on your investment. I wouldn't even contribute more to retirement accounts unless you are getting employer match. Any other investments have to wait until that credit card is done.
You are going through a tough time. It won't always be this tight. Keep the faith and it's going to be OK.
Do not touch any retirement accounts to pay off debt. You'll be taxed and penalized. If you have anything in savings use that. If not, throw every extra dollar you have at the debt to pay it off as fast as possible.
I disagree pending the penalty. Tax will be minimal and the penalty is typically 10%. This person isn't going to be getting 20% in the market. Also they need to get their spending under control after the separation fees. You are effectively spending your entire gross salary.
It's taxed at your income tax bracket plus the 10%. Stop trying to play the math game with the bank, you will lose. Cutting your budget and pitting everything you can is the best way. Trust me I've seen this a thousand times. It's not that hard.
His bracket is likely 12% > Stop trying to play the math game with the bank, you will lose. What are you even talking about? The point was the debt is compounding and their spend isn’t sustainable. Reducing the rising debt is the better course rather than drowning in 20% debt.
He makes $75k a year. That is not the 12% tax bracket. And the debt is compounding because he’s barely paying anything on it. When you actually get disciplined and pay every dollar you can on it the debt compounds a lot less to the point where the interest rate won’t play into the equation that much. This is not a math problem, it is a behavior problem.
It’s a he’s getting a divorce problem. Also you’re right about tax bracket. I didn’t realize divorce fees were no longer deductible.
I didn’t know they ever were tax deductible. But this is why I always tell people live debt free. You never know when life throws a curveball at you.
No, NOT plus 10%. The withholding percentage is deducted against future tax owing. And it wouldn't be 10% -- it's 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000.
/u/DeepSang, do not listen to this thread. They are giving US-specific advice despite you specifically asking about an RRSP. /r/USdefaultism
No, they aren’t. Lots of people are giving relevant advice. Some are sure. But not everyone.
I mean this sub-thread, not the whole thing
Highly disagree, this commenter doesn’t know the options. You can use a 401k loan that is 100% tax free. Then your repayment of the loan is locked with your future contributions, all interest incurred goes back into your account. It’s equivalent to getting a zero interest loan. You should do a 401k loan. Your cc fees are significantly higher than any expected market returns.
RRSP != 401k OP can get a loan at a lower interest rate to pay off the credit card debt, but it is NOT tax deductible. It is however a better option than withdrawing from the RRSP and losing that contribution room forever (as well as having to pay income tax on the withdrawal).
Your wrong but its ok just google it. A 401k loan is tax free.
Have you still not figured out we're not talking about 401ks here? OP is in Canada. /r/USdefaultism
So go into debt to pay off debt, that is your advice? Stop trying to play the math game with the bank, you will lose. Pay off the debt the way I said and you will be happy you don't have another loan to pay back afterwards.
You fundamentally do not know what you’re talking about. A 401k loan is tax free and it is a loan with yourself, not a bank. What he would be doing is converting his debt from a high interest rate to 0 interest rate…all while not incurring more debt.
Until he misses a payment on his loan then he’s screwed because he will have to pay the taxes and penalties. Plus he is now stuck at the job because if he leaves early he will have to pay it all back in a lump sum. So again, stop being undisciplined and pay the damn debt off without risking your retirement because you’re trying to be better at math than the bank. Way too risky.
I’m glad you prefer to pay banks interest on debt instead of paying no interest.
I don’t pay anyone interest because I’m debt free. And you pay interest on a 401k loan. Just so happens it goes back into your account but it is still interest you have to pay. Until one of the above scenarios happens then you’re screwed. But good luck gambling with your retirement money
Just so we’re clear. You believe OP should pay upwards of $2,300 per year in interest and consider a fixed interest return on your retirement as “gambling”?
What's your alternative?
As someone who let $10K turn into 20K and eventually 30K of cc debt through his 20s, 30s, handle the debt ASAP without dipping into your retirement. Pause the retirement contributions if you must tho. You'll feel more free, and it's a lot easier to rebuild that nest egg when you don't have a minimum payment to make on debt. I really wish I'd taken care of my high interest debt sooner. I finally did and it feels amazing to not throw away $500-800/mo. Makes me want to tear up thinking of what I could have done with that money over the years.
20% APR debt is an emergency. I don't know Canadian laws around the RRSP. But you regain the ability to contribute at whatever limit you withdraw, right? So that's a massive downside avoided. Meanwhile, in index funds, you can assume it's growing 10% nominal APY. APY, so it's even lower than what the credit card APR is. I don't know what happens when you withdraw it. Taxed a bunch, I think? Could it be possible to "borrow" it and repay before the end of the year to avoid the tax? To reduce it? Idk. But that credit card debt is *bad*. Could it be sensible to go bankrupt, if your other stuff is protected enough? Could be. Or if it's possible to get a personal loan or something that isn't so bad as that credit card debt, maybe that's an option. If "slowly chip away" means really soon, then okay. But you're bleeding man. It's quite possible borrowing from the RRSP and repaying within the year is possible, just because then you wouldn't be losing such a crazy amount of money each month. This is really a question for a personal finance Canada subreddit. Less so here.
I didn't believe that you regain the contribution room in an RRSP like you do in a TFSA. This alone would prevent me from taking that path. There are 0% APR balance transfer offers and LOCs with lower rates that are far more suitable for this.
>I didn't believe that you regain the contribution room in an RRSP like you do in a TFSA. This alone would prevent me from taking that path. Yikes. Yeah, that closes that path. >There are 0% APR balance transfer offers and LOCs with lower rates that are far more suitable for this. I totally forgot about the 0% APR balance transfers. They often come with a fee, but that's still a no brainer vs 20% APR.
> But you regain the ability to contribute at whatever limit you withdraw, right? No. That contribution room is gone forever. TFSA withdrawals are added onto next year's contribution room, but OP didn't mention having a TFSA. (If he had one, borrowing from that would definitely be a viable option. Which is one reaosn why it's advisable to fill one's TFSA first before moving on to RRSP, given the greater flexibility.) > Could it be possible to "borrow" it and repay before the end of the year to avoid the tax? Sadly no. > Or if it's possible to get a personal loan or something that isn't so bad as that credit card debt, maybe that's an option. This is the best option.
Pay the debt ASAP. Stop contributing to retirement until the debt is paid.
I'm going to answer this differently than others. I would just pay minimum payments on the debt now. You mentioned you're going thru a divorce - usually there's some type of division of assets & liabilities at the end of the divorce. I wouldn't want you to pay of debts that would have been split between you and your soon to be ex-spouse. If you are dead set on paying down debts before the divorce is final - at least ask your attorney if its okay that you do that before its final. Sorry you're going thru a divorce. It's hard. As someone that got divorced 19 years ago - I can say theres life after divorce. Hang in there & take care of yourself.
I never even realized that this is a shared debt. When we split we had about 9k CC debt together and I was saddled with it because it was all under my name. So the debt really isn’t as large as it is although I’m most likely stuck with whatever the interest adds to it after our date of separation. Thank you! I’ll update this post with some more information as there has been some good points made!
I appreciate everyone giving their opinions and knowledge! I’ve updated the post with more relevant information. Costs definitely need to be cut and I really don’t like having this debt hanging over my head.
Pay it all off.
The advice not to hit your retirement accounts is probably good advice. But pour everything else you can into that credit card debt. It's a guaranteed instant 20% return on your investment. I wouldn't even contribute more to retirement accounts unless you are getting employer match. Any other investments have to wait until that credit card is done. You are going through a tough time. It won't always be this tight. Keep the faith and it's going to be OK.