Is paying off debt with your RRSP a good idea?
Registered Retirement Savings Plans (RRSPs) are designed to reduce taxable income during working years while saving for retirement. The tax is deferred to the time you withdraw them, normally when you have left the labor market and your tax rate will be lower.
Cashing Out Could Cost You
If you cash them out now, beware, your tax bill will be hefty! Not only could your financial institution withhold up to 30%, but you are also likely to lose deductions and tax credits the following year since the withdrawn amounts will increase your income which might make you ineligible for certain tax credits or income supplements.
Remember that retirement is built over the long term and should be sheltered from the storms you go through during your working life. As its name implies, an RRSP is for retirement, and trying to solve a short-term situation with a long-term asset is probably not the best thing to do. So before dipping into RRSPs that took you years to accumulate, consult your financial institution, accountant or personal finance advisor at Jean Fortin to evaluate other options. For example, if you have other sources of savings such as a TFSA or an unregistered GIC, you should draw from these first.
RRSPs: a protected asset
Know that the Bankruptcy and Insolvency Act protects RRSPs from any seizure by creditors if you decide to file a consumer proposal or bankruptcy. This means that if you choose either of these option, your RRSPs are exempt from seizure except for contributions made in the last 12 months. The government has opted for this protection in order to guarantee a decent retirement for all Canadians. You should also have the same concern.
An RRSP is a valuable asset for retirement. Explore other solution paths before mortgaging your future income.
For any questions regarding your personal finances, don’t hesitate to contact our financial reorganization advisors at 1-877-777-2433 or book an appointment.
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