Those who give you a quick and definitive answer to this question are either incompetent or lying. Like with most financial decisions, there are multiple factors that need to be taken into account before an answer can be given. Each situation is specific not only in terms of numbers, but also in terms of personal comfort levels with debt, risk tolerance and preferences. If you just don’t like debt, go ahead and pay it off first. This may not be the best decision from the numeric standpoint, but if it makes you feel better, it is the best thing you can do. We are going to look at this question purely from the financial planning angle and ignore personal preferences.

The answer to this question basically depends on whether the return you can achieve in your RRSP is greater than the interest you are paying on your debt on the net basis. “On the net basis” is the key phrase here, and it makes everything complicated.

Some interest can be tax deductible. In Canada you can deduct your interest expenses for income tax purposes if your loan if used for business or investment purposes. For example, if you take out a mortgage on your home, your interest will not be tax deductible. But if you use the same house as rental property to generate income, this same interest can be deducted. Deductibility is a huge factor. For example, if you are paying 5% on your loan and your marginal tax rate is 40% your net interest expense is effectively only 3%. Generally, it is recommended to pay off the loans which qualify for interest deductibility and keep those which don’t.

Your personal tax rate is very important too. If your rate is low, you can’t take advantage of your loan interest deductibility. At the same time, you can’t take advantage of the tax refund from your RRSP contribution if your tax rate is low. And if your expected tax rate at retirement is high, all the gains you’ve made because of the tax refund may vanish when you start spending your money. RRIF income is 100% taxable.

Another thing to keep in mind is the fact that your RRSP contribution will only benefit you at retirement, while paying off your debt increases your ability to spend now. If you have more money than you can spend, do whatever makes most financial sense. And if you don’t paying off your debt probably makes more sense keeping everything else equal.

In conclusion, the question is so complex and there are so many factors involved that each situation must be looked at individually by a qualified financial professional.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.