A survey from the Bank of Montreal has found some alarminig results about Canadians when it comes to RRSPs because instead of locking them in for the retirement years they are dipping into the savings to cover debt and living expenses.
Doing so means they suffer HUGE tax penalties in the process and with Canadian household debt growing larger, the situation appears to be worsening.
Forty percent or participants in a survey, carried out for the bank by Pollara, said that at some point they took money out of their RRSP. How much are they taking? It looks like the number is on the rise, up nearly 22 per cent in a year, to $20,952 on average.
Experts say, taking money out of an RRSP should be only a last resort and there are only two scenarios when you should do it: to purchase a first home under the Home Buyers Plan, or to further your education under the Life Long Learning Plan. In both instances, RRSP withdrawals are not taxed so long as the money is eventually repaid.
The current survey found that buying a home is the most common reason for withdrawing from an RRSP, but lots of Canadians are taking out RRSP money to cover living expenses (23 per cent), for emergencies (21 per cent) and to pay off debts (20 per cent).
In those cases, money withdrawn from RRSPs is heavily taxed. For example, the government charges a “withholding tax” on withdrawals that financial institutions automatically hold back. Outside Quebec, that tax is 10 per cent on amounts of $5,000 or less, 20 per cent for amounts between $5,000 and $15,000 and 30 per cent on amounts greater than $15,000. (In Quebec, it’s 5 per cent, 10 per cent and 15 per cent, respectively, plus provincial taxes.)
How to Cope With Financial Struggles in Other Ways
LINE OF CREDIT
If you’re taking money out of your RRSP to cover a short-term or unexpected expense, consider taking out a line of credit instead. Financial experts note that lines of credit have considerably lower interest rates than credit cards.
DEBT CONSOLIDATION
If you’re taking money out of your RRSP to cover debt, the experts say you should look at all other options first, including debt consolidation.
MORTGAGE
You may also be able to consolidate all your debts into your mortgage, a move that may make sense if you are carrying a lot of high-interest debt.
OTHER SAVINGS OPTIONS BESIDES RRSP
If you need funds from your RRSP, you may be putting money into the wrong savings vehicle say experts. In that case, consider a tax-free savings account (TFSA) which doesn’t give you as large a refund at tax time, but does protect your savings from capital gains taxes. And you can withdraw without penalty, so long as you don’t withdraw the same year you put the money in.
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