What’s the best way to deal with debt?

We’ve been asking readers for financial questions. Here’s one we received recently: Q: I am 69 years old and continue to work part time. I am saddled with quite a lot of debt and I am fully retiring at the end of September this year. The company will be paying my unused accumulated vacation time of about $ 14,000. I am assuming a tax hit of more than 20 per cent, or roughly $ 3,000. Is there any way I can avoid that tax deduction? For example, can I have the entire amount deposited in to a registered retirement savings plan? ( I have the contribution room). This would give me a tax refund next year of about $ 3,000, which would help pay off some debt. I could then start collapsing the RRSP at the rate of $ 5,000 per month, which as I understand it would only be taxed at a 10- per- cent rate, or about $ 1,400, saving me about $ 1,600. Next year, my wife and I will have a combined monthly income of about $ 3,400 so we’ll be in a fairly low tax bracket.

Pay down debt with accrued pay

Personal finance reporter Tracy Sherlock posed this question to certified financial planner Michael Thorne and here is what he said. A: You have not given us any details of your “quite a lot of” debt, but paying off debt from a fixed retirement income is usually very difficult. The most effective strategy may be to use the net vacation pay funds to reduce your debts. I recommend you consult a certified financial planner or other professional who is familiar with debt issues, to minimize your debts before retirement. You have the option of depositing the net amount to an RRSP, which will offset most of the taxes withheld on the vacation pay, but limits the immediate use of those funds. If you deposit those funds in your RRSP, and then choose to take $ 5,000 monthly redemptions starting in January 2013, each withdrawal will be subject to a 10 per cent withholding tax. However, you will likely have to pay additional tax on this income when you file your 2013 income tax return, since tax rates increase as income increases with the highest tax paid on the last dollars received. Your pension income can be considered your base income ( low rates) and the RRSP income will be additional income, which will be gradually taxable, likely higher than the 10 per cent withheld at redemption. You will also continue to pay interest on the remaining debt, which offsets a substantial part of any “gain” you receive from making the RRSP deposit.