Don’t treat your RRSP like an ATM

RRSPs are a great way to save, but Bruce Sellery says they don’t make a good emergency fund.

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Question

I want to withdraw $15,000 from my RRSP for some personal needs. The bank says they will take away $3,000 and give me $12,000 and that I can also expect to receive a T4 for the withdrawal. My income is around $45,000 per year and I am single. Approximately how much tax I will be paying for that extra $15,000?

Answer

Cashing in a portion of your RRSP is painful. It’s supposed to be to encourage you to keep that money invested until retirement. But it sounds like you really need access to that cash, and, as painful as it is, you now have to face the reality of the tax implications.

Paying tax on RRSP withdrawals

There are a number of variables that will affect how much income tax you will end up paying on the $15,000 withdraw. For example, which province you live in, the source of the income and other tax deductions you may have.

Jason Heath, a fee-only financial planner with Objective Financial Partners, says that based on the information you provided you would roughly owe $4,500, or about 30% of the RRSP withdrawal, when you make your next tax return. “The $3,000 the bank will withhold is just a prepayment of some of the tax. Banks are required to withhold a certain percentage of the RRSP withdrawal—20% or $3,000 in this case.”

Exploring other options

It sounds like you were taken aback by the amount of tax the bank told you they would withhold. But, as Heath explained, that’s just the beginning. In your case after tax you’ll only have $10,500. This makes me wonder if you’ve explored other avenues. How else could you come up with that amount?

If you own your home, could you refinance the mortgage? Do you have investments outside of your RRSP? If you do, would you consider cashing them in instead? Or could you get a line of credit and use those investments as security for a lower rate? Is there a family member who could loan you the money? Do you have any other assets that you could sell?

That said, withdrawing from your RRSP really might be your only option. Heath has the glass is half full way of looking at your situation. If you saved the 30% tax on the initial contribution of this $15,000 and invested it, then with a little luck it’s grown over years. If that was the case then you’re simply repaying the 30% you already received as a refund. Unfortunately, that’s less likely given the recent market performance. “One shouldn’t make a habit of RRSP withdrawals if there are other more efficient options,” Heath says. “But sometimes people fall on tough times and shouldn’t feel guilty about having to make tough decisions.”

It sounds like you have a tough decision ahead of you; best of luck in making it.

ask@moneysense.ca

One comment on “Don’t treat your RRSP like an ATM

  1. Until recently, this is exactly how the banks viewed home equity. Need help with cashflow? A mortgage refinance or an increase in a Home Equity Line of Credit allowed homes to be treated like ATMs. Now that lower loan to value limits for lines of credit are imposed and refinances are limited as they rely on conservative appraisals, the quick easy fix is an RRSP withdrawl.

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