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Q: I was recently gifted $10,000 from a family member. Should I use it to pay off debt or put it toward my retirement savings? A: According to recent research, 55 per cent of Canadians say paying off debt is their definition of financial wellness, while 68 per cent of Canadians 55 and older define financial wellness as “retiring comfortably.” Meanwhile, in the second quarter of 2025, close to 1.4 million Canadians missed a credit payment, suggesting debt levels are growing and saving for retirement is becoming more challenging. Conventional money wisdom would suggest immediately paying off debt if you were to be gifted $10,000 — especially debt with a high interest rate like credit cards, says Carlo Cansino, senior financial adviser at Assante Capital Management. “I am also a proponent of this. However, I would be remiss if I didn’t consider other factors that could benefit their financial situation,” Cansino says. Cansino would take a look at one’s annual income to see if there is an opportunity to move their income to the next lower marginal tax bracket by making an RRSP contribution, as RRSP contributions are tax-deductible, meaning they reduce your annual taxable income. He would also look at cash flow (would the RRSP contribution generate a tax refund to provide extra funds to pay down the debt faster?); investment rate of return within the RRSP (is the before-tax rate of return higher than the interest rate of the debt?) and the investor’s personal feelings toward debt (do they hate the notion of owing anything to anyone?). “I want my clients’ money to work the hardest for them,” Cansino says. “In many cases, paying off a 29 per cent interest rate credit card will do this for them.” However, if the tax savings or refund after making an RRSP contribution is higher, then it might make more sense to do that, he says. For someone who lives in Ontario and earns $150,000 per year, Cansino says making a $10,000 RRSP contribution will provide a $4,341 tax savings or refund (based on a combined federal and provincial marginal tax rate of 43.41 per cent). Then you could use that money to pay off some of your debt while at the same time growing your retirement savings. If you’ve already made an RRSP contribution this year, just make sure you’re aware of your RRSP contribution limit, which is either 18 per cent of your earned income in the previous year or the annual limit (for 2024, it’s $31,560) — whichever is lower — plus unused contribution room from previous years. “To conclude, the most obvious answer would be to pay off the high-interest-rate debt. However, more factors should be considered before making the decision,” Cansino says. Money Coach is a weekly feature that helps Canadians find helpful solutions to personal finance challenges. If you have a question, email Lora at lgrady@thestar.ca.
