Has your financial situation changed? Are you thinking of withdrawing from your RRSP to pay for your expenses or repay your debts? Before you proceed, it’s important to understand the consequences of doing this and to take a look at the other options available to you. Here’s a five-point overview.
“Yes, you can, but it should never be your first option,” admits Vanessa Houghton, senior advisor at National Bank. “Taking money out of your RRSP before you reach retirement triggers many tax consequences that you need to fully understand.” Here are five of them:
Regardless of how much money you’ve accumulated in your RRSP for your retirement, you won’t be able to benefit from it in its entirety to pay for your expenses or repay your debts.
In Quebec, upon withdrawal, your financial institution will deduct taxes (federal and provincial) that range between 21% and 31%.
*Rates may vary and are provided for illustration purposes.
Outside of Quebec, the deductions are as follows*:
*Rates may vary and are provided for illustration purposes.
Moreover, depending on the type of investment, your financial institution may impose additional exit fees.
“If your taxable income is close to the upper limit of a tax bracket, the amount you withdraw from your RRSP could move you to a higher bracket,” the expert added.
For example, in 2019, someone living in Quebec earning $35,000 per year who withdraws $10,000 from their RRSP will move to the next tax bracket, which ranges from $43,790 to $87,575. They will therefore be taxed 20% instead of 15%.
Tax brackets are different in Quebec versus the rest of Canada, so it’s important to do your research. They can also change from year to year.
When you withdraw money from your RRSP, the contribution room you’ve benefitted from cannot be recovered. Once you regain financial stability, you won’t be able to put that money back into your RRSP. A ceiling and a maximum percentage of your salary are determined every year for RRSP contributions.
RRSPs are investments for your retirement. For those who contribute to a retirement plan, your RRSP is an extra source of income. For others, such as self-employed workers, often this represents their only source of income when they retire, apart from government pension plans. Regardless of your situation, if you don’t save, you could jeopardize your comfort upon retirement at an age when unexpected expenses related to healthcare, for example, could arise.
By withdrawing from your RRSP before you retire, you’re also missing out on the chance to grow your money over the long term thanks to compound interest. For example, if you place $7,000 in an RRSP for 30 years at an annual rate of 5%, you will earn $24,274, for a total of $31,274.
“Yes, it’s better to withdraw from your TFSA rather than your RRSP. The amount you withdraw is not taxable and you will be able to contribute again the very next year. But even so, withdrawing from your TFSA should be a last resort. A TFSA should not be treated like a savings account or emergency fund. It’s a tool to save money that will complement your income when you retire.”
“Before withdrawing from your RRSP or TFSA, you should meet with your advisor to explore other possible options depending on your situation. They will also be able to suggest tools you can use and give you advice on paying off your debts, getting better at managing your finances, and returning to financial stability.”
There may be a number of solutions at your disposal, like consolidating your debts, selling assets like a car, or refinancing your mortgage, for example.
There are two scenarios in which it may be a good idea to withdraw from your RRSP before you reach retirement age. “The first is if you want to buy your first home. The Home Buyers’ Plan (HBP) will allow you to withdraw up to $35,000 to put towards your down payment. You will have a maximum of 15 years to pay back this sum as of two years after the withdrawal was made.”
If you want to go back to school, you could also use your RRSP. “With the lifelong learning plan (LLP), you can withdraw from your RRSP to pay for your school fees and any other fees related to going back to school.” This program allows a maximum withdrawal of $10,000 per year, for a maximum total of $20,000. You will have ten years to repay the sum you withdrew.
Finally, if you have to withdraw from your RRSP, all you have to do is submit a request to your advisor, who will take care of filling out a form and having you sign it. They will make sure you are aware of all the tax consequences triggered by withdrawing the money. The amount you withdraw, minus deductions, will then be deposited into your account.
For an overview of the matter, make an appointment with an advisor, who will analyze your situation while guiding you towards financial stability.
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