Should you pay off debt or contribute to your RRSP?

Paying off debt should always be top of mind, but does that mean we should swap out our retirement and savings goals because of it? After all, your RRSP contributions can help reduce your taxes depending on how much you earn. And you can always use the tax return to tackle your debt, and potentially get the best of both worlds. Here are six questions to ask yourself to help you make the best decision for your circumstance.

1. What kind of debt are you carrying?

If you’re loaded down with high-interest credit card debt, paying it off should be a priority. Shelling out 10 percent, 15 percent, or even 20 percent in interest payments will financially kill you over time. On the other hand, carrying mortgage debt isn’t as bad — you’re paying off an asset and you’re probably paying a lot less interest.

2. How much do you owe?

Carrying a big debt load is a heavy burden both financially and emotionally. If you’re struggling to make mortgage payments or have a ton of high interest debt (read: credit cards) then you might want to make debt repayment a bigger focus.

3. How old are you?

The closer you are to retirement, the more focused you should be on paying off debt. You don’t want to be making interest payments when you’re on a fixed income — especially if interest rates go up and you find yourself strapped for cash.

4. How much do you make?

The more money you make, the more bang for your buck you'll get from your RRSP. So if you’re earning in the top tax bracket, every $1,000 you contribute nets you a $400 tax break. If you’re not earning that much money and have high debt, focus on getting it paid off fast.

5. What kind of RRSP do you have?

If you have a group RRSP and your employer matches your contribution, then you should be taking advantage of it. That would be money lost, otherwise!

6. What does the math say?

At the end of the day it’s a fine balance between what you’re paying on your debt and what you could be earning in your RRSP. Do the math to see where you stand. (This handy calculator can help walk you through it.)

Follow money expert Caroline Cakebread at Twitter.com/ccakebread.