You're Drowning in Debt. Could Your RRSP Be The Lifeboat You Need to Get Out of It?

When trying to pay off debt, be aware that withdrawing from your RRSP comes with a variety of taxes and penalties that could reduce the value of your overall account and cause longer-term financial challenges. But, there are some methods to utilize your RRSP to prevent yourself from possibly accumulating more debt. Here are some things to be aware of before you consider withdrawing from your RRSP.

The Cost of Taxes

On Withdrawal:

It’s important to consider the tax consequences before withdrawing money from your RRSP. The amount of tax you will pay is dependent on your location and withdrawal amount, which adjusts based on three ranges.

The overall tax percentage for each range depends on your location, but typically increases depending on the amount of your withdrawal, these ranges are:

• 10 percent on $5,000 or less
• 20 percent on payments between $5,000 and $15,000
• 30 percent on anything above $15,000¹

Quebec also follows this range, but charges a lower tax percentage per range - five percent, 10 percent and 15 percent, respectively.¹ 

On Income:

The amount that is withdrawn from your RRSP is considered income for the tax year. Therefore, it will be calculated like other income during the year. However, your overall taxes can also increase if the amount you withdraw pushes you into the next tax bracket, causing you to pay more in taxes than you typically would.

Long-Term Damages

Difficult to Recover:

Your RRSP has limits on how much money you can contribute annually. This means that if you withdraw from your RRSP before retirement, attempting to recover the amount that was withdrawn may be difficult.

Reduced Interest in RRSP:

The limit to the overall and contribution amount also impacts the long-term interest on your RRSP. By withdrawing early, you impact the compounding effects that interest could have on your account. This could have a serious impact on the size of your RRSP at retirement, depending on how long you have had it.

The Good News:

However there are ways to withdraw from your RRSP without doing long-term damage to your retirement. And, by being aware of these options, you can prevent yourself from accumulating extra debt and still tap into your RRSP. These options include the Home Buyers’ Plan and Lifelong Learning Plan. 

The Home Buyers’ Plan

The Home Buyers’ Plan allows you to purchase or build a home for yourself, or a disabled relative, using funds from your RRSP.² The only requirement is for the home to be located in Canada and considered eligible, however, eligibility is rather broad, and most homes would fit the category.² 

The Lifelong Learning Plan

The Lifelong Learning Plan allows you to pay for training or education for yourself or your spouse or common-law partner using funds from your RRSP.³ The plan restricts the amount that can be withdrawn each year, and cannot be used to fund the education or training of your children, your spouse or common-law partner’s children.³

There may be several drawbacks to using your RRSP to pay off debt. But, understanding how it can be utilized can help prevent you from accumulating extra debt, and put you closer to paying it off.