Personal Finance

How to best utilize $18,000

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  • Dec 5th, 2014 10:05 pm
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Deal Addict
Dec 3, 2014
2348 posts
1840 upvotes
Ontario

How to best utilize $18,000

I have approximately $18,000 that I am trying to determine how to best utilize. Here is my info:

- age 29
- annual income: $102,500

Assets
- I own my vehicle - approx value $10,000
- I own a house in name, but its a recent purchase and the bank owns most of it (interest 2.94%)
- TFSA savings account at Tangerine: $6,600 (I think it's 2.15% interest)
- Chequing account: $24,000 (includes the $18K)
- RRSP invested in a few individual stocks - approx. $5,000

Debt
- OSAP approx. $15,000 (5.5% floating interest rate, tax deductible)
- mortgage - a lot - 2.94%

I am trying to determine how to allocate the $18,000. I do not want to pay down the mortgage as it is split ownership with my girlfriend and she cannot afford to match my payment against the mortgage. I could wipe out the OSAP and eliminate that debt, although the interest on it is tax deductible. I have $28,620 in room in my RRSP for 2014 contribution.

I am leaning towards either paying off the OSAP in full and putting the rest in my savings account/spend on a trip, or making an RRSP contribution, or a combination of both. I like the idea of getting rid of the debt, but I also hate taxes and I've already paid over $31,000 in income tax this year. I work as a lawyer in the private sector, so I do not have a pension, but my income will continue to rise.

Any suggestions are welcome.
17 replies
Newbie
Nov 12, 2014
30 posts
Concord, ON
When you say the tax is deductible from your OSAP loan, what does that mean exactly?

I'm debating paying off my OSAP in the first year of payments (currently), but this seems interesting. So any interest I pay, I'm guessing here, will be returned to me when I file my taxes?
Deal Expert
User avatar
Aug 2, 2010
15196 posts
5016 upvotes
Here 'n There
A tax deduction does not return the deduction to you but merely reduces your taxable income.
Newbie
Nov 12, 2014
30 posts
Concord, ON
eonibm wrote: A tax deduction does not return the deduction to you but merely reduces your taxable income.
So it's still better to pay off the loan? I guess depending on how close you are to the next income level?
Deal Fanatic
Jan 21, 2014
8511 posts
6255 upvotes
my opinion, max out your RRSP, take the money from tax return and pay OSAP or mortgage or TSFA
Newbie
User avatar
Dec 4, 2014
45 posts
9 upvotes
Concord, ON
mkl38s wrote: my opinion, max out your RRSP, take the money from tax return and pay OSAP or mortgage or TSFA
+1
Sr. Member
User avatar
Apr 5, 2009
948 posts
334 upvotes
Toronto
The tax deduction for OSAP interest is just the bare 15%, so your effective rate is 5.5% * 0.85 = ~4.7%. Still not an awesome rate, I'd pay that off first. If you expect your income to rise, you can hold off on contributing to RRSP until after that debt is paid off, it will save you more tax in the future.
Deal Addict
Feb 20, 2008
2674 posts
801 upvotes
Debt sucks, man. Kill the OSAP, throw the rest into your RRSP, then throw your tax return right into your mortgage principle.

Keep $50 for something fun.
Deal Addict
Dec 3, 2014
2348 posts
1840 upvotes
Ontario
Kerolles:

The amount of interest you pay on your OSAP loan can be used as a tax deduction. It effectively reduces your taxable income in the year it is applied. Greenmoon likely knows it better. I had assumed that meant that if my only deduction for the year was OSAP interest and lets say just for example's sake, I paid $2,500 in interest and made $102,500, I would only be taxed as if I earned $100,000. The marginal rate for income earned in the $87,907-$136,270 range is 43.41%, so I would receive a tax rebate of 43% of $2,500 = $1,085.21.
Deal Guru
Feb 9, 2006
13375 posts
8306 upvotes
Brampton
Put it all on black

Seriously kill the OSAP, SM the equity in the house and invest that money to make it tax deductible.
Sr. Member
Sep 25, 2006
598 posts
58 upvotes
Ottawa
Kill the OSAP. Throw the rest into your mortgage. Stay discipline.
Deal Expert
Oct 7, 2010
15536 posts
5790 upvotes
What's with the Op having so little savings making 100k per year? Sounds so failed.
Deal Fanatic
User avatar
Nov 2, 2013
5697 posts
1522 upvotes
Edmonton, AB
Less risk adverse: throw it into riskier stocks

More risk adverse: pay off your OSAP.
Accountant (Public Practice)
Sr. Member
Sep 25, 2006
598 posts
58 upvotes
Ottawa
^
I think it's because he studied law which typically requires an undergraduate degree (4 years) with good grades and LSAT scores before enrolling in law school (4 more years). He probably graduated at 26 and have since acquired a home as well as working to pay off osap. He's doing fine.
Newbie
Apr 21, 2012
49 posts
2 upvotes
Vancouver
llpresident wrote: Kerolles:

The amount of interest you pay on your OSAP loan can be used as a tax deduction. It effectively reduces your taxable income in the year it is applied. Greenmoon likely knows it better. I had assumed that meant that if my only deduction for the year was OSAP interest and lets say just for example's sake, I paid $2,500 in interest and made $102,500, I would only be taxed as if I earned $100,000. The marginal rate for income earned in the $87,907-$136,270 range is 43.41%, so I would receive a tax rebate of 43% of $2,500 = $1,085.21.

you get tax credit (only 15%) for the interest paid on OSAP. greenmoon is correct. So if you don't believe you can invest and get a return higher than 4.7%, then pay off the loan.
Sr. Member
User avatar
Oct 24, 2011
623 posts
180 upvotes
Timmins
llpresident wrote: Kerolles:

The amount of interest you pay on your OSAP loan can be used as a tax deduction. It effectively reduces your taxable income in the year it is applied. Greenmoon likely knows it better. I had assumed that meant that if my only deduction for the year was OSAP interest and lets say just for example's sake, I paid $2,500 in interest and made $102,500, I would only be taxed as if I earned $100,000. The marginal rate for income earned in the $87,907-$136,270 range is 43.41%, so I would receive a tax rebate of 43% of $2,500 = $1,085.21.
That's not how it works. The full amount of the OSAP interest is not a deduction against your income. As Greenmoon pointed out, it is a non-refundable tax credit of 15%. So your tax credit would be 15% of $2500 = 375, that would increase your personal credits, and reduce your tax owing. You might or might not get a refund based on that depending on your whole tax situation.
Member
Mar 31, 2013
396 posts
84 upvotes
Toronto
Pay off the OSAP immediately. For the remaining 3k, pay off mortgage or put into TFSA or RRSP (as long as expected rate of return is higher than the 2.94% mortgage).

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