Using pension money to pay down debt

Q: My husband is 65 and will soon be “paid off” to retire. The reason he’s still working is because we still have a sizable credit line debt of $50,000. (no mortgage or credit card debt). My husband will have a healthy DC pension that could pay us about $25,000 a year if we buy an annuity. As all the experts say you shouldn’t retire with debt, I was thinking of taking out the amount we owe from my small private pension and paying off the debt. I know that I will be hit with taxes but at least we will be debt-free. What is your opinion on this?

— Judy M.

A: Paying off debt is an effective part of your overall retirement readiness although it doesn’t have to be absolute. In today’s low-interest environment, servicing debt is quite cheap so paying extra tax unnecessarily may be more expensive than the debt interest payments.

Start by ensuring you are paying the lowest interest rate available. Taking out a Home Equity Line of Credit (HELOC) will reduce your interest rate to 3.2% according to RateHub. The annual interest would amount to $800.

Pay off your debt with non-taxable source of funds if that is available

• TFSA savings
• Non-registered investments
• Downsize your home

Accessing taxable sources of income may be necessary if none of these apply to you. Fortunately, some of your taxable income is exempt so it makes sense to increase your taxable income to at least the exempt amount. The Federal personal amount is $11,635 (2017) and provincial amounts vary. I generally recommend increasing your personal annual taxable income to $20,000. You can estimate your tax by using the calculator at TaxTips.ca.

Your husband’s tax rate can be anticipated to be much lower in 2018 as it will be his first year of no employment earnings and he gets additional tax relief having attained age 65. His income can also be a source of debt repayment.

You can’t control the tax on your husband’s termination pay but the net amount may also help to pay off debt.

Develop a schedule that is light on tax and pays off your line of credit within five years.

Tom Feigs is a Certified Financial Planner at Money Coaches Canada

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