2018-10-11
Many Canadians contribute to registered retirement savings plans (RRSPs) to fund their retirement. This is a great way to provide additional income when you no longer work full-time, as well as augment other federally sponsored programs such as Old Age Security (OAS) and Canada Pension Plan (CPP) later in life.
One of the reasons why RRSPs are so effective – aside from the immediate tax and compound interest advantages – is their structure creates intentional barriers to access the funds. Generally, you can't simply go into your online banking and transfer RRSP funds to your chequing account when your balance is low or if you want to make a significant purchase. You'll need to meet with a bank representative, fill out paperwork and pay income tax on the withdrawal.
However, for people who are struggling financially – either facing a large unexpected expense, or having trouble keeping up with their debts – cashing in RRSPs can still seem like the most logical solution to their problem.
After all, what could be the downside to accessing your own hard-earned money?
If you're in a position of financial difficulty there are two critical reasons why you either cannot or would not want to withdrawal money from your RRSPs:
Many employer-sponsored programs have specific restrictions surrounding cashing out your RRSP contributions. For example, if you enjoy the benefits of an employer-matching program, they may have stipulations that they will no longer match any future contributions following a withdrawal from the program.
RRSP contributions are tax exempt. That means you either contribute from your pre-tax income, or you can write your RRSP contributions off to reduce your taxable income when you file your annual tax return. It also means any withdrawal from your RRSP is taxable just like your employment income.
Any money you take from your RRSPs is added to your other annual income to calculate your total annual income tax. While you're solving the most immediate financial problem, you could face another one when it comes time to file the following year's return.
Canadian bankruptcy law places specific restrictions on RRSPs when calculating the assets available to your creditors. From a federal perspective, creditors may only access RRSP contributions made in the 12 months prior to filing for bankruptcy. However, there are also specific exemptions which vary from province to province. Depending where you live, your jurisdiction may prevent creditors from seizing RRSP funds altogether.
It's also important to remember you may have serval other options available to you, too. When you meet with a Licensed Insolvency Trustee for a Free Confidential Consultation, they will review your entire financial situation and help you understand which ones are best for your unique situation. While you may benefit from a bankruptcy or Consumer Proposal – they may also offer other alternatives such as debt consolidation, financial counseling or seeking help to improve your budgeting skills.
You don't have to sacrifice your financial future to get a financial fresh start. Trust a Licensed Insolvency Trustee to help you find the right path to debt freedom, so you can continue to look forward to a happy and prosperous retirement.
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