CANADIANS CASHING IN RRSPs BEFORE RETIREMENT IS NOT A SOLUTION

Cashing in RRSPs before retirement: Introduction

Cashing in RRSPs before retirement is never a good idea. It seems that as life gets more and more expensive, fewer Canadians are saving for their retirement. A recent BMO survey reports that only 46% of Canadians are planning to contribute to RRSPs this year. What is most alarming is that 38% of Canadians have made early withdrawals and were cashing out RRSPs before retirement this year, compromising their retirement savings. In fact on average, Canadians have withdrawn $17,213 from their RRSPs this year, an increase of $1,305 from last year.

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Why are Canadians cashing in RRSPs before retirement?

• 30% – Purchase a house
• 21% – Living expenses
• 18% – Pay off debt
• 18% – Pay for emergencies
• 13% – Other

Why are Canadians cashing in RRSPs before retirement instead of using the Home Buyers’ Plan to buy a house?

Canadians are using the Home Buyers’ Plan but it’s only for first-time buyers. They access their RRSPs to buy houses and borrow up to $25,000 from their RRSP. The money must be paid back over 15 years. There is no penalty for making the withdrawals, as long as you pay the money back in the specified time frame. Unfortunately if you’re not a first-time buyer or need more than the $25,000 allowed, you have a problem.

Are Canadians concerned about cashing in RRSPs before retirement?

• 75% are very concerned about the consequences
• 73% say they’re familiar with the tax penalties or the rules for repayment under the Home Buyers’ Plan
• 19% don’t expect to pay the funds back

So notwithstanding that Canadians understand the consequences of cashing out RRSP before retirement, they do not feel they have any other alternative.

Is cashing in RRSPs before retirement for living expenses ever a good idea?

According to Chris Buttigier, director of wealth planning publications with BMO Wealth Management, “It’s concerning to see that so many Canadians are dipping into their RRSPs to meet short-term needs, which should only be considered as a last resort. Canadians need to consider more options that may be available before making any withdrawals. Make sure you have fully considered the ramifications of the early withdrawal tax consequences. In most cases, RRSP withdrawals will count as income in the year the money is taken out and taxed at your highest marginal rate”.

Is cashing in RRSPs before retirement to pay debt a good idea?

It’s clear that many Canadians are in financial trouble. Before cashing out RRSPs before retirement and emptying out your retirement savings to pay living expenses and debt, contact a professional trustee. There are other options than cashing in RRSP before retirement and compromising your retirement.

We approach every file with the attitude that financial problems can be solved given immediate action and the right plan. Don’t be one of the Canadians cashing in RRSP before retirement. Make an appointment with the Ira Smith Team for a free, no obligation consultation and Starting Over, Starting Now you can get back on track to debt free living. Give us a call today.