Making regular contributions to a Registered Retirement Savings Plan can be a great way to build your net worth. But what if you’re facing a cash shortfall: Is a withdrawal a viable option? Kim Parlee walks us through some of the hidden costs of early RRSP withdrawals. Head here for more information on RRSPs.
- Today, on "Ask MoneyTalk," we have this question. I need a few thousand dollars right now to cover some expenses. Should I take it out of my RRSP, which is my Registered Retirement Savings Plan?
So I'm tackling this question today. I talked to a whole lot of experts. And I want to start things out by just first clarifying the question. We are not talking about taking money out of your RRSP for Education, which is part of a lifelong learning program. And we're not talking about taking money out of your RRSP to buy a home, which is part of the home buyers plan.
Today, the question is really about getting a few thousand dollars out of your RRSP for immediate cash needs. So we're going to weigh the pros and cons on that. And then you're going to have to decide what's best for you for your situation.
So let's start with the pros. Pro number one, it is your money. And you have access to it, provided it's not locked-in plan. So you can get it. That's it for the pros. There's only one.
There's a much longer list of cons. We're going to run through those now. Con number one, taxes. When you take money out of your RRSP, you need to pay taxes.
Now, if you take it out from a financial institution, there's a withholding tax rate of 10% when you withdraw up to $5,000, 20% up to $15,000, and above $15,000, you're going to pay 30%. On top of that, if your tax rate is higher than that, you may end up paying more tax on top of that. So that's something to keep in mind is the money you take out, you will not be able to keep it all. You will need to pay taxes.
Con number two, sacrificing your growth. Growth in your RRSP has two great things going on, compounding and tax sheltering. Investments can grow inside an RRSP. And then, that growth compound even more growth. And when it happens inside that RRSP, you don't have to pay taxes on it, because it's tax sheltered. And that means there's more money to compound.
Let's take a look at a real-life example. Let's say you have $5,000 inside your RRSP. And with a 5% return every year, compounded annually for 30 years, that $5,000 could turn into over $21,000. So if you take that $5,000 out now, you're going to be losing that growth and that $21,000 it could turn into in the future.
Con number three, contribution room. Every year, you are allowed to contribute a percentage of your income into your RRSP. If you choose not to use that contribution every year, it just rolls over year to year to year. But if you put money in and then you take it out, that contribution room is gone permanently. You may not get it back. So you lose the opportunity for that growth that we talked about earlier.
So that is a list of the pros and cons. Again, you're going to have to make the decision what works best for you. But make sure you go into it with a fully formed decision.
Now, if you have a question for "Ask MoneyTalk," you can send it into firstname.lastname@example.org, subject line "Ask MoneyTalk," and we'll get that question answered for you.