Should I use my RRSP to pay my debts?

Is withdrawing your RRSP to pay your debts a good idea?

What a good question. Unfortunately, there isn’t a simple answer. It depends on your debt:

• How much debt you have
• What type of debts you have
• The interest fees associated with your debts

Using your assets to pay your debts

You’re deep in debt but have valuable assets: a car, a cottage, a snowmobile, an RRSP, etc. In many cases, it makes sense to use some of these assets to repay your debts. RRSPs, however, are different for two primary reasons:

• Taxes
• Their status (subject to seizure or not)

The impact of withdrawing your RRSP on your taxes

To repay part of your debt, you decide to sell your snowmobile. You get $6,500 for a vehicle that cost you $11,000. Since you made no profit, you won’t pay tax. You can therefore put that $6,500 towards repaying your debt.

Fiscally speaking, withdrawing your RRSP has a different impact.

You have no snowmobile or other assets to sell. You therefore decide to dip into your RRSP. You withdraw $6,500 to pay a portion of your debts. However, this amount is subject to a withholding tax: 26% in Quebec and 20% in Ontario.¹  You also might have to pay an additional amount based on your income when you file your income tax return.

For example, if you are a resident of Quebec and your tax rate is 40%, you will receive only $3,900. $1,690 will be levied on withdrawal from the $6,500 total. You will then have to pay $910 when you do your taxes. You will lose $2,600.

So, is it really worth it? Very rarely, in my humble opinion.

To know for sure, calculate your tax rates and compare them. Is it better to pay taxes on withdrawing your RRSP or to pay interest on your debt?

Is your RRSP subject to seizure?

If you do not have enough in your RRSP to repay your debt or if it would not be advantageous to withdraw it, you have a third option: Meet with a Licensed Insolvency Trustee (LIT).

An LIT will analyze your situation and, if necessary, explain how a consumer proposal or a bankruptcy could help you.

You should know that in either case, your RRSP will be protected.

According to section 67 of the Bankruptcy and Insolvency Act (BIA), your RRSP is exempt from seizure except for contributions made in the 12 months preceding the bankruptcy.

Neither your RRSP nor any other assets are seized in the event of a consumer proposal.

Therefore, you can settle your debts and start fresh while retaining your RRSP. Note: this is not a flaw in the system. There is a certain logic to this measure.

People take years to accumulate money in their RRSPs for retirement. Their debt should not compromise their ability to meet their needs when they leave the workforce. If that were the case, the financial situation of seniors, which is already precarious, would be even more alarming.

So, should you use your RRSP to repay your debts?

In addition to verifying that this solution makes financial sense, ask yourself whether withdrawing your RRSP will really solve your problem. Nothing is more disheartening than draining your RRSP completely, only to realize that you will have to declare bankruptcy anyway. You will have lost all your savings for nothing when they could have been protected.

My advice:

Meet a Licensed Insolvency Trustee at Ginsberg Gingras before making a decision. You will receive an objective analysis of your situation, and then you can make an informed choice.

This way, you will know if using your RRSP is the right option for you. If it isn’t, we can give you more information about bankruptcy, consumer proposals, and other options to help you.

¹Immediate withholding tax when withdrawing RRSPs (before filing your tax return)