Have you considered withdrawing from your RRSP or other retirement savings plans to pay down your debts? Have you thought of using your RRSP to take a vacation or as a ready source of cash?
Withdrawing from your RRSP early can have some unintended tax consequences. There may be alternatives to using your regular or self-directed RRSP for debt reduction or other ways to access cash you may need.
RRSP Withdrawals & Income Taxes
The financial institution that holds your RRSP is required under to withhold a portion of the withdrawal for income tax. The RRSP withholding taxes are as follows:
RRSP Withholding Taxes
| RRSP Withdrawal | Withholding Tax |
|---|---|
| up to $5,000 | 10% |
| $5,001 to $15,000 | 20% |
| $15,001 and up | 30% |
In Quebec, the withholding rate is ½ of the percentages in this table.
For example, if you have $20,000 of debt, you would need to withdraw at least $28,600 from your RRSP ($28,600 – 30% = $20,020).
Although, you may be thinking that you could reduce the amount of withholding tax to 10% by doing four $5,000 withdrawals, you may be doing yourself more harm than good.
The withdrawals from your RRSP are added to your taxable income and the withholding tax may not be enough to offset the extra tax that is actually due on the withdrawal. You could be hit with a tax bill at the end of the year!
Also note that some financial institutions are looking at clients who have made multiple RRSP withdrawals and may require the higher withholding rate be applied!
An Example
Jim earns $40,000 and needs $20,000 to pay off his debt.
If Jim does a lump sum withdrawal of $28,600 he will receive $20,000 to pay off his debt.
At the end of the year, Jim’s employer would have remitted $6,400 of tax for his employment income and the bank would have withheld $8,600 for his withdrawal.
His taxable income would be $68,600 and would still owe $360 to the government as a result of the withdrawal.
On the other hand, if Jim decided to do four withdrawals of $5,600 each, the total tax withheld would only be $2,200. At the end of the year Jim would owe the government an additional $5,300!
Are There Alternatives To Withdrawing From Your RRSP?
I am of the opinion that an RRSP you should never withdraw from your RRSP to pay down personal debt! Think about the following alternatives to withdrawing from your RRSP:
- RRSPs & RRIFs are Creditor Protected. If you find yourself unable to pay your creditors, you may be facing bankruptcy. Know that if you go into bankruptcy, RRSP contributions made more than 2 years prior to bankruptcy cannot be touched by your creditors.
- Consolidation Loans. If you still have good credit and are finding that your debt payments are getting out of control, consider consolidating your debts into a single payment. The single payment should be lower than your combined payments and the term of the loan is fixed (so there is an end in sight). If you consolidate, take steps to eliminate your credit cards and other lines of credit so you don’t find yourself in this situation again.
- Consumer Proposal To Creditors. If you are unable to get a consolidation loan, you should consider seeking the help of a consumer credit counsellor and make a proposal to creditors. The proposal can reduce the amount you pay and avoids bankruptcy. However, a consumer proposal will show on your credit report and affect your credit rating for 3 years.
- Bankruptcy is a process of eliminating your debts. With bankruptcy personal assets may be sold to satisfy all or some of your debts. Contributions made your RRSPs more than two years ago will be exempt from your bankruptcy and certain other personal assets (varied by province).
- RRSP Mortgage: If you are thinking of paying down your mortgage with your RRSP, consider an RRSP mortgage instead. The RRSP mortgage allows you to hold your own mortgage inside of your RRSP. In the end you are paying off yourself!
- Education Withdrawals You can withdraw under the Life Long Learning Plan (LLP) tax free as long as you pay it back later on.
If you are considering cashing out your RRSP to pay down your debts, please contact us for a custom analysis of your situation.
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What are the tax implications if I have had no employment income for 2009 and 2010 and I cash in a 50K RRSP. I would use this money to pay down credit card debt of about 35k.
The full amount of RRSP withdrawal will be added to your taxable income for the year. The plan provider will withhold 30% and you will end up with $35,000 after the withholding. Depending on how much other taxable income you have, the 30% ,may or may not be enough.
I was just on the phone with a Royal Bank Rep and he told me that Quebec is NOT 1/2 of the table.
In fact I have to pay double the rate.
15 to 20%.
The table show Federal tax withheld.
I want to know what the rules are to cashing in my mutuals . I have gone back to school later in life and was informed by my advisor that if I earned less than $5,000 last year I could withdrawal my funds , but I may have to put it back in 2 1/2 years time . Anyone have any addditional info. I am starting a new employment position where I am required to have a newer vehicle , so I need some othe funds for that reason . The position pays huge and it is flexible hours and a very good company to work for .
I suspect your advisor is referring to the Life Long Learning Plan (LLP). The plan allows you to withdraw if you attend an approved post secondary education program.
I have two RRSP with different institutions. I would like to close out one of them, use some of the money to pay down debt and then put the rest into my other RRSP. Can I do all of this at once?
I appreciate the help, thanks!
Clare,
You can transfer from one RRSP to another without tax implications. You can withdraw what you need to pay down debt and then consolidate your remaining RRSP accounts.
Be sure you are aware of the income tax implications of the RRSP withdrawal.
I am self employed and do not draw on wages from my business instead I take a dividend at the end of the year. This results in paying $0.00 taxes although my business pays the taxes on the dividend instead of getting a deduction for payroll expenses had I drawn a wage. This is basically a trade off but I save on the Canada Pension because my company does not have to match the amount I would have to pay. My question is should I withdraw some of my RRSP,s now? If I withdraw about $14000.00 it should be tax free.
Federally you pay tax after $10,320 assuming only the basinpersonal amount and that you do not receive dividends.
This is a very informative blog to which I have a planning question:
I have done very well within my sheltered RRSP and TFSA. To the point I’m looking at 7 figures by the time I go to cash out. I am currently 55 years old.
What is the latest age that I can defer cashing out and, what options are available to marginalize tax burdens.
Thank You
Fred,
Please see What Happens To My RRSP When I Turn Age 71.
Appreciate the link. Next question:
I now hear that any contribution to spousal RRSP must come out of my “room”. I cannot top off my limit and contribute further to the spousal.
Is this good information?
Thanks!
Found the answer – I’ll try not ask anymore until I’ve given the entire site a thorough read.
Cheers!
Yes. It is your contribution room and your deduction.
Both my wife and have pensions that are fully indexed up to 6%/ yr. max, combined gross pension of $110,000 +CPP +Investment Income of aprox.$12,000. Currently have $26,638 in our TFSA. Our tax bracket should increase over time.
What is the best way to draw down our RRSP? Have no debt and monies left in our RRSP will be taxed at 50% when if we are both deceased. Please respond in an email as then I will be assured of your answer
You will probably be better off over the long run to leave the funds in the RRSP and draw them out as a RRIF minimum after age 71. Any RRSP meltdown strategies are high risk and, in my opinion, nor worth the effort.
Maximize your pension splitting options as this will lower your overall tax bill.
I have my TFSA holdings in a self directed traded account. I am told that my discount house does not do private placements (PP) and that a PP is deemed an asset transfer.
I am told by fellow investors that full service brokers ARE doing PP’s for clients within TFSA accounts including warrants.
If I were to change to full service broker, are PP’s in fact allowed under TFSA accounts?
Thx
@Fred,
It would really depend on whether the underlying investment was a “qualified investment” for the purposes of the TFSA.
The phrase “private placement” speaks to how an investment is brought to market and is not the investment vehicle itself. For example, a public corporation could issue its shares on a designated stock exchange or instead, it could issue them to a single (or group of investors through a private placement). The real question that must be answered is whether the shares or debt or other investment vehicle meets the conditions.
yes, this particular one does meet RRSP/TFSA eligiblity
I think what you might be referring to is a syndicate offering where the company places its shares with a syndicate of investment dealers who then sell the shares to their own clients.
Most discount brokerage do not participate in this market because they do not have a network of brokers to sell the securities to their clients.
The short answer to your question is that if the investment itself qualifies as TFSA eligible then you can hold it in a self-directed account regardless of what the institution is. However, since you deal at a discount brokerage, you may not be able to participate unless the broker can buy into the syndicate.
If you go to a full serve brokerage firm, you may be able to participate, but if you participate and then pull out immediately, you will probably be charged some transfer out fees. In addition you’ll have to pay their commissions on the placement.
If the placement is simply publically traded securities, you may be better off buying them on the open market through the discount broker.
During the course of exchange here I am in process of having a new TFSA account set up with a full service broker.
I’ll be transfering cash out of the discount side via form 2033 to the new account.
The PP purchase is direct from the company together with a group of investors. Due to the volume and market availibilty, it makes sense to participate. The full warrants are a bonus.
Original question was due to information I had rec’d from the discount house that PP’s were considered “asset relocation”. Obviously this is wrong and inaccurate advise. I’ll be taking them up on it.
Thanks again for great info.
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