A post I wrote last week really had me thinking on what to do with an extra $150 I just freed up in my budget. I talked about how I should throw that $150 on my debt, especially since I had recently adjusted my debt repayment with my new job and budget.
But then, after writing that post I started thinking again because I received a 1.5% cost-of-living increase for my day-job. And when I get thinking, over-thinking is just around the corner.
So the way my thought-process initially worked was “hey, I’ll put that extra 1.5% into my RRSP” because then I’ll never get used to it and I won’t miss it. Which would be a great strategy if I wasn’t in debt. And also, if I didn’t know I have a tax bill coming.
See, I have a rental property which I don’t talk about too often on this site because it was out of sheer desperation that I’m a landlord (I would have had to take a pretty large loss). And after expenses that gives me an extra income of roughly $7,000 per year. But it isn’t really mine… it is going towards the mortgage. That money isn’t sitting liquid in an account. It’s equity.
The trouble? It’s income… which means it needs to be taxed. At my marginal tax rate of nearly 40%. Which means that $7,000 will give me an amount owing of about $2,800. Yeesh!*
Now I do have some tax credits and deductions left over from being a student (tuition credits are great things, aren’t they), but I don’t think it will be enough to zero out my $2,800 tax bill.
So that means I’d likely have to pay income tax, and a good chunk of it. Let’s say I have enough credits to drop my tax owing from $2,800 to $1,500. That means I’d have to drop $3,750 into an RRSP to get my 40% tax back to negate the amount owing.
Where does this leave me? My RRSP contributions at work have the income tax-adjusted on the spot, so I can’t expect any amount back from those contributions. And that’s also another reason why I won’t throw that 1.5% COL increase into my RRSP. Because it won’t necessarily help me try to scrounge up some money for what I realize will be a decent-sized tax bill.
But what if I take that 1.5% increase, and also my $150 that I just freed up for debt, and set it aside with the purpose of making an RRSP contribution when I know how much tax is owed. I have 6-8 months to save some scratch, depending on how you look at it (January vs. March for contributions) which could get me $1,200 – $1,600 ready to use for my RRSP.
Now that’s still shy of $3,750 by over $2,000, but I might be getting a bonus at Christmas time. Or I have a 3-pay month coming up in December. And those will get me closer.
So what do you say? Put the money toward debt as I previously thought, or save it to buy into an RRSP when I know how much to drop in?
*Yes, I know my property isn’t cash positive in this case when tax is calculated in. Let’s not get into that, because it’s doing a better job than carrying it empty and selling for 25% less than what I paid!