I lack money. Can I dip into my RRSP to cover my bills?
« , »heading »: » », »fullWindow »:false, »fullBleed »:false, »showFullBleedOnMobile »:false, »headColor »: » », »type »: »html5mobile », »textColor »: » », » mobileImageUrl »: » », »bgColor »: » », »imageUrl »: » », »registeredOnly »:false, »linkUrl »: » », »aodaTitle »: »Chart – Amount of tax payable on withdrawals advances RRSP », « internalScroll »:false, »displayStyle »: »small-up »},{« text »: »Consider other options before touching your RRSP. “If your income is moderate to high and you work, I would always consider an RRSP the last place you would look to pay debt or expenses,” says Heath. He recommends Canadians look to a tax-free savings account first, as it allows tax-free withdrawals. », »type »: »text », »isParagraph »:true, »isHeading « :false},{« text »: « Bridge warns that borrowing money to pay off debt without a plan is ‘not good’ and could be a sign that you need to take a hard look at your budget. If you really need to borrow to pay off debt, it should be a short-term solution to cash flow problems, and Bridge suggests using a line of credit instead of racking up expenses on credit cards. « , »type »: »text », »isParagraph »:true, »isHeading »:false},{« heading »: » », »pollid »: »11205657″, »type »: »poll »},{ » type »: »ad », »heading »: » ARTICLE CONTINUES BELOW », »name »: »ArticleSecondBigBox », »display »: »middle-down », »pos »: »2″, »interstitial » :true, » sizes »:[[300,250]]},{« text »: »Lines of credit offer lower interest rates than credit cards. Most credit cards charge an annual interest rate of around 20%. 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The advantages and especially the disadvantages of using your RRSP to repay your debts.
If recent interest rate hikes have put you in a financial bind, you may be thinking of tapping into your RRSP to cover your living expenses. But is it a good idea?
The answer, in most cases, is no.
Jason Heath, managing director of Objective Financial Partners, and Steve Bridge, a financial planner specializing in consulting at Money Coaches Canada, say there are several downsides to this strategy.
On the one hand, Bridge says that once you withdraw money from an RRSP, it’s taxed as income the year it’s withdrawn — and contribution room is lost forever. The only times you can withdraw from an RRSP and repay it are when you use the Home Buyers’ Plan to buy a house or the Lifelong Learning Plan to fund your education.
The higher your income, the more tax you pay when you make early withdrawals. “If someone with a modest to high income wants to withdraw money from their RRSP to pay off debt, they could lose 20 to 50 percent of that withdrawal in income tax,” says Heath.
Consider other options before touching your RRSP. “If your income is moderate to high and you work, I would always consider an RRSP the last place you would look to pay debt or expenses,” says Heath. He recommends Canadians look to a tax-free savings account first, as it allows for tax-free withdrawals.
Bridge warns that borrowing money to pay off debt without a plan is “not good” and could be a sign that you need to take a hard look at your budget. If you really need to borrow to pay off debt, it should be a short-term solution to cash flow problems, and Bridge suggests using a line of credit instead of racking up expenses on credit cards.
Lines of credit offer lower interest rates than credit cards. Most credit cards charge an annual interest rate of around 20%. Meanwhile, according to the personal finance comparison website Finder, the current average interest rate for a secured personal line of credit is around four percent and seven percent for an unsecured line.
“Sometimes people find themselves in bad financial situations and have no other choice,” says Heath. « That’s not to say you can’t catch up to replenish your RRSP later, but I do think you really need to consider all options before an RRSP withdrawal. »
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