Should I cash in my RRSPs to pay down my debt?

While it can be tempting to solve a short-term cash problem with long-term savings, cashing in your RRSPs to pay down debt should be a last resort. You will need your RRSPs when you retire. If you cash them in now you have less time to save than when you first invested the money.

It’s smarter to look at your overall budget and commit to changes that will solve your debt problems. In other words: see what you can do to pay down your debt from your income - yes, that means make a budget.

Once you develop a realistic budget, you many find you cannot pay off your debts without changing your lifestyle. Sometimes people have difficulty getting out of debt because they have large ‘secured’ debt repayments.

Do you own a boat, a quad, or a motorhome? Did you finance it? These items may be nice to have and your family may really enjoy them, but if you have a difficult time paying off your other debt (credit cards, loans, student loans, etc.) then you need to think about getting rid of the ‘toys’.

Ideally, you should sell the asset and pay off the associated debt. If you plan to sell the asset and recognize there will be a large shortfall, then you need to think about letting the creditor seize the asset. If you are in a province where the secured creditor can either ‘seize or sue’, then letting the creditor seize the asset may be your best choice.

But won’t a seizure hurt your credit rating? Yes, it will. However, you need to start taking a long-term view here. If you aren’t getting out of debt, then you’re not saving. And if you’re not saving, then you’re going to continue having debt problems. Time to make a choice. Ongoing debt problems or savings?

If it’s a small amount of debt you need to pay off, then look at your budget and pay off your debt from your income by setting a budget and sticking to it.

If you have a large amount of debt and you have difficulty paying it off, then you may want to talk to a Trustee about making a proposal to your creditors. The trustee will help you determine a monthly payment that makes sense. A sensible payment is:

• Affordable
• Something you can commit to
• Gives you relief so you feel you are moving forward in life

Back to your RRSPs.

Most RRSPs are protected from your creditors. Whatever funds you invested in an RRSP more than a year earlier are protected from seizure in a bankruptcy or in a Consumer Proposal.

Any money you invested in your RRSPs within the last year may be accessible in a bankruptcy (every province has different laws that may or may not protect these recent RRSP contributions) but not in a Consumer Proposal.

So, keep those RRSPs. Come retirement time you’ll be thankful you did.