Why withdrawing early from RRSPs to pay down debt can lead to ‘regret’.
Updated: 7 hours ago
Original article by:
Deanne Gage
THE GLOBE & MAIL
December 14, 2022
📰 Read the FULL ARTICLE here.
I spoke with The Globe and Mail about why dipping into your RRSP early to pay down debt can lead to regret. Here are the highlights and my contributions.
Key Takeaways
Early RRSP withdrawals trigger withholding tax and are added to your income, which can push you into a higher tax bracket.
You permanently lose that contribution room, along with the future growth on the money.
RRSPs are meant for long-term retirement savings; a TFSA is better suited to short-term needs.
RRSPs are generally protected from creditors, so cashing them out to pay off debt can be a costly mistake.
If you can't keep up with your debts, a licensed insolvency trustee can walk you through your options.
My Perspective
In my experience, parents rarely touch their kids' RESP money, even when there's no penalty for doing so. They'll dip into their own retirement savings first.
"It's the mindset of it being the kid's money and being a provider for your child."
Part of the problem is advice that pushes RRSP contributions at all costs. I've had new clients come to me with large RRSPs but ongoing monthly cash flow shortfalls, because they felt too embarrassed to ask their previous advisor to lower or pause their contributions.
"RRSPs are great and saving is important, but there are other avenues to invest that can provide greater flexibility and liquidity."
I've also seen clients use RRSP savings to pay off five-figure credit card balances after years of debt. A comprehensive budget and cash flow plan should come first, so your savings strategy actually fits your life.
Originally published in The Globe and Mail by Deanne Gage on December 14, 2022. Use the link at the top of this post to read the full article.
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