Your RRSP refund: invest it back or pay down debt?

You got your RRSP refund. Now you're staring at $2,800 wondering if it should go back into your RRSP or knock down that credit card balance.

The answer isn't about discipline or being "responsible with money." It's about interest rates.

If your debt charges more interest than your investments can reasonably earn, pay the debt. If your investments can beat the debt rate, invest. The crossover point sits around 6-7% for most people.

Here's why that number matters: credit cards charge 19-22%. Student loans sit around 6-7%. Your mortgage is probably 4-6%. Meanwhile, a balanced portfolio might average 6-8% over time - but with no guarantees year to year.

The math works differently for each debt type

Credit card debt at 20%: Pay this first. No investment reliably beats 20% annually. Even if you're in a high tax bracket and the RRSP contribution would generate another refund, that 20% interest compounds monthly.

Line of credit at 7%: This is where it gets interesting. You might beat 7% in the market over time, but you're gambling on returns versus a guaranteed 7% saved by paying off debt. Most people should pay off debt at 7% or higher.

Mortgage at 5%: Here the RRSP usually wins, especially if you're earning $70k+ and the contribution generates a meaningful refund. At a 30% marginal rate, every dollar you contribute gives you 30 cents back immediately, then grows tax-deferred for decades.

The catch with reinvesting your refund: you're essentially doubling down on RRSPs. Your original contribution plus the refund both sit in the same tax-deferred bucket. If you're already maxing out your RRSP contribution room, this might push you toward more tax diversification.

Consider your full picture

Someone earning $85k in Ontario who gets a $3,200 refund faces a specific trade-off. TaxSplit.ca shows that putting the refund back generates another $960 refund next year - but only if they have room and haven't already hit the annual limit.

Meanwhile, that same $3,200 applied to a 6% line of credit saves $192 in interest annually. The RRSP refund of $960 beats the $192 debt savings, but you're trading guaranteed savings for tax-deferred growth that might not materialize.

Your age matters too. If you're 35, you've got 30 years for compound growth to work. If you're 55, paying off debt might make more sense since you're closer to needing the money.

The hybrid approach

Split it. Put half toward debt above 6%, half back into your TFSA or RRSP if you have room. You get some guaranteed debt reduction plus some growth potential.

This works especially well if you have both high-interest debt (credit cards) and low-interest debt (mortgage). Kill the credit card debt first, then invest the rest.

The wrong move: letting the refund sit in your chequing account while you debate. That earns nothing and helps nothing.

If your debt is above 7%, pay it off. If it's below 5% and you have RRSP room, reinvest. Everything in between depends on your risk tolerance and how much you value the guaranteed return of debt elimination.