More Canadians are withdrawing from their RRSP’s to pay down their debts, but could they be saving more money?
40% of respondents polled by the Bank of Montreal (BMO) said they have made a withdrawal from their RRSP; the average withdrawal in 2017 was $20,952, almost 22 per cent more than the average amount of $17,213 taken out in 2016.
Why are Canadians withdrawing from their RRSP’s? The survey showed that Canadians need the money:
There are a lot of things to consider when thinking about taking from your RRSP savings, but ultimately it comes down to a number of calculations to ensure you know the exact cost of withdrawal and how it will affect your overall financial health in the long term.
Once you deduct money from your RRSP, the financial institution will take off an amount to pay withdrawal taxes between 21-31% (depending on the amount). With the exception of Quebec*, the rates for residents are:
*Quebec residents pay half the interest rate but are charged provincial tax. More information available at Revenu Quebec. Non-residents of Canada pay 25% unless they live in a specific country that is subject to a lower rate.
Sun Life Financial has a helpful calculator that can show you how changing how much you put in your registered retirement savings plan (RRSP) can affect your retirement savings and show you what would happen if you took money out before you retire.
2. Taxable Income
The amount you withdraw from your RRSP will be added to your taxable income and could potentially move you into the next bracket, meaning you will have to pay more in income tax. If you must withdraw from an RRSP, it’s ideal to do so during a taxable year where you have reduced, little or no income (Such as a job loss), to avoid paying additional taxes that you would at a higher income level.
3. Contribution Room
Unlike programs for first time home buyers or students that allow you to “borrow” from your RRSP, you are not able to replace it. The contribution room that you were building will be lost forever and you won’t be able to add any additional funds beyond your annual limit.
4. Compounding Interest
The greater the amount in your RRSP account, the more money you’ll have when you go to withdraw it at retirement. As interest accumulates on your investment your balance will grow and you’ll make even more interest off the total amount. When you withdraw from your RRSP’s you’ll lose the growth potential of that amount, setting you back by reducing the amount of interest you earn each year.
When considering all the factors that affect the amount you will receive after taxes as well the effect it will have on your retirement income and your quality of life down the road, it can be hard to determine the best option for your future. Once you are in your golden years your ability to earn income will be diminished, so it’s better to have more money in your retirement savings now and allow it to work for you by growing with compounding interest.
All of these factors beg the question – what are the alternatives to pay back debt?
A Licensed Insolvency Trustee can help you examine all of your options. Our debt management professionals have helped thousands of people manage their excessive debt, repair their credit scores, and achieve a fresh financial start to take them into their golden years. Contact us to book a free consultation in Eastern Ontario and Quebec: firstname.lastname@example.org or call 1.800.517.9926.