Is withdrawing from your RRSP a good idea?

Is withdrawing from your RRSP a good idea?


Has your financial situation changed and you are thinking of withdrawing from your RRSP to pay your expenses or your debts? Before proceeding, it is important to fully understand the consequences of this operation and to review the other options available to you. Overview in 5 questions.
1. Can I withdraw from my RRSPs to pay off my debts or expenses?

"Yes, it can, but it should never be your first option," said Vanessa Houghton, senior advisor at National Bank. Taking out your RRSPs before retirement has several tax consequences that you should understand. Here are five:
Early disbursement results in withholdings

No matter how much money you accumulate in your RRSP for your retirement, you will not be able to use all of it to pay your expenses or your debts.

In Quebec, at the time of disbursement, your financial institution will withhold taxes (federal and provincial) between 21% and 31% *.

    For a withdrawal of less than $ 5,000, the holdbacks are around 21%. By withdrawing $ 5,000, you would only have $ 3,950 left over after the $ 1,050 deductions to pay off your debts.
    For a withdrawal between $ 5,001 and $ 15,000, the holdbacks are around 26%. For a withdrawal of $ 15,000, the amount retained will be $ 3,900. So $ 11,100 will be deposited into your account.
    For a withdrawal of more than $ 15,000, the deductions are around 31%. For a withdrawal of $ 16,000, $ 4,960 will be subtracted, giving you the right to $ 11,040.

* Rates may vary and are given as examples.

Outside Quebec, the deductions are as follows *:

    10% for withdrawals of $ 5,000 or less
    20% for withdrawals between $ 5,000 and $ 15,000
    30% for withdrawals over $ 15,000

* Rates may vary and are given as examples.

In addition, depending on the type of investment, your financial institution may charge additional exit fees.
The amounts withdrawn are added to your taxable income

"If your total taxable income is near the upper limit of a tax bracket, the amounts withdrawn from the RRSP could put you at a higher tax rate," adds the expert.

For example, for 2019, a person in Quebec who earned $ 35,000 per year, and who withdrew $ 10,000 from his RRSP, went into the second bracket of taxable income, which ranged from $ 43,790 to $ 87,575. This person was therefore taxed at 20% instead of 15%.

The tax brackets differ between Quebec and the rest of Canada. It is therefore important to be well informed. They can also change from year to year.
You lose these contribution room

When you withdraw money from your RRSPs, the contribution room you received is non-renewable. Once your financial health is restored, you will not be able to put the amounts withdrawn back into your RRSP. A limit and a maximum percentage of your salary are set each year for your RRSP contributions.
You decrease your retirement funds

RRSPs are an investment for retirement. For those who contribute to a pension plan, RRSPs will be a source of supplemental income. For others, such as the self-employed, they will often be the only income in retirement, with the exception of government plans. Whatever your situation, by depriving yourself of these savings, you could jeopardize your comfort in retirement, at an age when unforeseen expenses related to your health, for example, could be necessary.
You lose return opportunities

By withdrawing your RRSPs before retirement, you are also depriving yourself of the opportunity to grow your money over the long term through compound interest. For example, a sum of $ 7,000 placed in an RRSP for thirty years, with an annual rate of return of 5%, will result in earnings of $ 24,274, for a total of $ 31,274.
2. Should I be withdrawing money from my TFSA instead?

“Yes, it's better to withdraw from your TFSA than your RRSP. The amounts withdrawn are not taxable and you will regain your contribution room the following year. But again, withdrawing from your TFSA should be a last resort. The TFSA should not be viewed as a savings account or an emergency fund. It is a tool for saving money that will supplement your income in retirement. "