Is withdrawing your RRSP to pay your debts a good idea?<\/p>\n
What a good question. Unfortunately, there isn\u2019t a simple answer. It depends on your debt:<\/p>\n
You\u2019re 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:<\/p>\n
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\u2019t pay tax. You can therefore put that $6,500 towards repaying your debt.<\/em><\/p>\n Fiscally speaking, withdrawing your RRSP has a different impact.<\/p>\n 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<\/sup><\/a>\u00a0 You also might have to pay an additional amount based on your income when you file your income tax return.<\/em><\/p>\n 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.<\/em><\/p>\n So, is it really worth it? Very rarely, in my humble opinion.<\/p>\n To know for sure, calculate your tax rates<\/a> and compare them. Is it better to pay taxes on withdrawing your RRSP or to pay interest on your debt?<\/p>\n 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).<\/p>\n An LIT will analyze your situation and, if necessary, explain how a consumer proposal<\/a> or a bankruptcy<\/a> could help you.<\/p>\n You should know that in either case, your RRSP will be protected.<\/p>\n According to section\u00a067 of the Bankruptcy and Insolvency Act (BIA)<\/em>, your RRSP is exempt from seizure except for contributions made in the 12 months preceding the bankruptcy.<\/p>\n Neither your RRSP nor any other assets are seized in the event of a consumer proposal.<\/p>\n 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.<\/p>\n 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.\t\tIs your RRSP subject to seizure?<\/h2>\n