What’s an RRSP?
An RRSP (Registered Retirement Savings Plan) is a means of saving money during your professional life, with the objective of increasing your revenue for retirement so as to maintain a certain quality of life.
All individuals under the age of 71 and earning an income in Canada are eligible for an RRSP.
Contributing to an RRSP offers you several benefits, such as:
- Lower taxes: Investment-generated revenue (interest, dividends and capital gains) is not taxable, as long as the money remains in your RRSP
- The earlier you start saving, the more money you will earn: a few dollars can translate into several thousands of dollars when you retire
- You can immediately benefit from fiscal advantages when your revenue is higher, and you contribute regularly to your RRSP
You might be tempted to dip into your RRSP to pay off your debts, but is it a good idea?
Pulling Money out of RRSPs to Pay off Debts: The Implications
Touching one’s RRSP to pay off debts is not advisable, since there are certain consequences to consider (link in french). It’s important to realize that this savings vehicle was specifically designed for use upon retirement, not before.
But what about if your debt is mounting and you’re seriously considering taking money out of your RRSPs to pay off the debt? Here are some things to consider before paying off your debts with your RRSP:
1- Taking money directly out of your RRSP will cost you
If you want to make a withdrawal from your RRSP, a portion of this money will be subject to withholding taxes. Depending on the amount withdrawn, certain rules apply:
- For a withdrawal of less than $5,000, a withholding tax rate of 21% applies
- For a withdrawal of between $5,000 and $15 000, a withholding tax rate of 26% applies
- For a withdrawal of greater than $15,000, a withholding tax rate of 31% applies
In other words, if you want to withdraw $10,000 from your RRSP to pay off your debts, you will actually need to withdraw $12,600 to be able to access the full amount.
2- The Amount Withdrawn Becomes Taxable
Depending on your tax bracket, the amount withdrawn from your RRSP could boost you to a higher tax bracket.
In other words, if you’ve withdrawn %10,000 from your RRSP to pay off your debts, and you earn $35,000 per year, your taxable income will jump to 20% for individuals earning between between $41,935 and $83,865 instead of the current rate, which would have been 16%.
3- Your Retirement Fund is Diminished
It’s important to plan for retirement, whether it’s just around the corner or far off into the future. In fact, your RRSP will likely be one of your only sources of income once you’ve stopped working.
It’s therefore important to keep this money in your RRSP instead of using it to pay off your debts. This way you’re ensuring yourself a certain degree of financial comfort when you do retire.
Think of Other Solutions
Using one’s RRSPs to pay off debts is not a good idea. We instead suggest you share your situation with a professional team which will be able to guide you towards the best solution for paying off your debts without further affecting your current or future finances.
You can contact the Licensed Insolvency Trustee N. Séguin, specialized in insolvency and financial recovery. The advisors at N. Séguin will be able to offer the best solutions customized to your personal financial situation. Free yourself from debt.