22 Feb 2016

Some people may have resorted to dipping into their RRSP to pay some bills. There are ways to get back from there and also ways you can avoid doing so. With some other options that we have for you, you may be able to make better decisions while understanding the consequences.

Short Term Implications

There are withholding tax if you pull money out of your RRSP prior to retirement

– Withdrawal of $5000 or less is 10%
– $5000 – $15,000 is 20%
– $15,000+ is 30%

For example, if you had a $10,000 to pay off, you will need to pull out $12,500 in order to net $10,000 after tax.
You will also need to include the amount into your income at the end of the year. The withholding tax may not even be enough – depending on your tax bracket.

Long Term Implications

– Impacts your RRSP contribution room that you won’t be able to get back (this may only be an issue if you are in your 50s)
– An erosion of your net in your future (For example, if you take out $25,000 to pay something off in a 5 year window, your opportunity cost will be around $40,000)

Already dipped in? How do you get back?

– Look at where you are in terms of your RRSP, contributions, and your plan
– If you are paying debt, there are different alternatives such as TFSA (Tax Free Savings Account), Emergency Savings Plan, Consolidation Loan (lower interest and lower payments), low interest line of credit, refinancing a mortgage, non registered investments, or CPP eligibility.

Exceptional Circumstances

– Government approved programs (first time home buyer or a life long learning program) allows withdrawals for these purposes. They provide a plan on how to get back and pay them back over a period of time depending on the plan

In uncertainty, always see us or any financial adviser before making your own decisions without any knowledge!

Have questions? Comment below or send us a message!