Withdrawals from your Registered Retirement Savings Account
Lesson 10 Chapter 4
In an emergency such as this, it may make a lot of sense to withdraw money from your savings. A place you may want to turn is your Registered Retirement Savings Plan (RRSP).
Although this is an option, you’ll want to be extremely cautious. Rather than solving problems for you, it could create new headaches.
Any money you withdrawal from your RRSP is taxable income. It is the same a receiving a pay cheque and paying tax on it.
If you have a lot of debt
If you went into March and April of 2020 with a lot of debt you may be headed towards bankruptcy or a consumer proposal.
I apologize for being blunt, but if this applies to you, you are better off wrapping your head around this idea before you are forced into it.
In this case, if you have few options for borrowing debt and you don't have value in a home to access (or it is maxed out) a very common place people turn is their RRSP.
Making withdrawals from retirement savings are made to buy more time. However, in a situation where you have high debt payments and a reduced income due to coronavirus, withdrawing from your RRSP will only buy a little bit of time before you are in the same spot again: declaring bankruptcy.
When a person declares personal bankruptcy, the money saved for retirement in RRSPs and Locked-In Retirement Accounts (LIRA) is often protected and not accessible to creditors. There are exceptions, but money that you have recently contributed to RRSPs to keep it from creditors is not protected. But if you regularly saved over a lengthy period in an RRSP, it should be safe from creditors.
If you have a lot of debt and do not have assets like a home to use to refinance, you may have to come to terms with the idea of using personal bankruptcy as a way to restart and rebuild. Taking money from your RRSP will only buy a short amount of time before you must declare bankruptcy anyway but this time your retirement savings will be depleted.
If you feel this is your situation, it is wise to speak to a Licensed Insolvency Trustee to discuss your best options. Do this instead of taking money out of your RRSP.
Try to borrow the money first
If you have the option to borrow money on a line of credit, you may want to consider that before taking money out of your RRSP. There are a few reasons for this:
- We are still in the first half of 2020. You likely earned income in the first few months of the year. Any payments from the Canada Emergency Response Benefit (CERB) or Employment Insurance (EI) will also be income for 2020. Added to that any income you may still earn in the second half of 2020 (assuming you can return to work) your total income for the year may be high enough that adding additional income from your RRSP will cause you to pay more tax than you think on the money you withdraw.
- Before social distancing kicked in, you likely had a long-term investment strategy for the money in your RRSP. Therefore, with the market downturn, your investments likely decreased a lot. It may not be the best time to cash in some of those investments to create a temporary income.
- You'll get the full amount you need. When you take money out of your RRSP, the government holds a percentage back to help cover the assumed tax. Therefore, you'll have to take out more money out of your RRSP to account for the withholding tax.
Withholding tax rates on withdrawals from RRSPs
Up to $5,000.00
$5,000.01 to $15,000.00
youIf you can borrow the money, you can always withdraw money near the end of 2020 when you know for sure what your taxable income was for the year. If your income never returned by the end of the year, then you can make a withdrawal knowing the tax implication. If you do it now, the only way to reverse it is to make a new RRSP contribution for 2020.
If you must withdrawal money from your RRSP
I understand, you need money to live.
If you feel the RRSP is the best place to get income, then treat it like an income. As a minimum to get by you need a specific amount of money every month, then withdraw that amount every month.
For instance, if you are short $750 every month, withdrawal $833.33 from your RRSP (10 percent goes to tax to leave you with $750) every month on a specified day. Treat it like a pay cheque. This will help you withdrawal only what you need and manage that money. With a large lump sum withdrawal you will pay more to withholding tax and you may not need all the money if you are able to go back to work and continuing earning an income.
With some simple rough math, you'll be able to know how much time/income you'll be able to buy yourself by making RRSP withdrawals. For instance, if you have $35,000 in RRSPs, you'll have 42 months of withdrawals of $833.33 (net $750) until you run out of money. If you can buy yourself many months of income, you'll bridge the time until you regain employment.
If you can only buy a few months of time you'll have to reduce your expenses, or you'll need to look out to what would happen in a few months and consider whether you really should be withdrawing from your RRSP.