We all know that life can throw you curveballs. In some cases, you may find yourself in a position where you’re contemplating withdrawing funds from your RRSP. But pulling money out before retirement may not be the best financial move. Georgia Swan, Tax and Estate Planner, TD Wealth, joins Anthony Okolie to discuss what to keep in mind if you’re in this situation.
Originally published June 27, 2023
Thank you for inviting me.
So let's jump in. First off, what are some of the circumstances that might push people to withdraw from their RRSP early?
Well, life, basically. Life can throw you so many curveballs, injury, illness, a loss of a job, and so many other things, just the day-to-day requirements of keeping the kids fed and clothed, and yourself with what you need. So all of those things can conspire sometimes to make you get to the point where perhaps you have no other option but to pull money out of your RRSP. And I say this from no position of superiority because this was something that I had to do quite a number of years ago in order to make ends meet. So I know what it feels like, and there's no shame in it whatsoever.
OK, so can you shed some light on the consequences of pulling your money out early from an RRSP?
So RRSPs were originally created just to incentivize people to save for retirement. So when you take money out, the first thing is that there is going to be withholding tax. So you have to consider that if you need a fixed amount of money, like $10,000, you might have to pull out more than that in order to hit that number. Then the money is also going to be considered income, so you're going to have to declare it on your tax return.
* As a result, you may end up in a higher tax bracket, or basically, you'll just have to pay more tax. As well, you lose the ability of that compounding that happens when you leave the money in your RRSP. And the problem with that is even a small amount taken out could end up having a significant effect on your overall savings over your lifetime because of that loss of compounding.
Yeah, you're taking that money out of your investments, and it's important to stay invested in the markets.
Exactly. The other issue is that you lose the contribution room. So it's not like if you take it out, you can then regain the contribution room and put it back in, and that's another thing that can affect your overall financial planning.
Now, what are some of the steps you should be taking to avoid having to withdraw from your RRSP? Because you mentioned some of these tax consequences of pulling out early.
Well, first and foremost, it's an idea of doing all that great planning that people tell us to do, so budgeting, making sure that you try to put aside three months, six months amount of expenses that you have, and then looking-- basically, if you are contemplating this, trying to look at other options. So can you get a loan? Now, not, of course, from credit cards and taking out cash. But are there some options for low interest loans or something else that might help you to not have to go this route?
OK, so you mentioned looking to get a loan if necessary. Why might this be a potential optional?
Well, because it can have less consequences, basically. Because as I said, there's a number of consequences from taking out of your RRSP. But if you can get a loan, if you do have some savings, such as a TFSA, it's much better to look to that. Of course, we are going to look at what the interest rate is and so forth. But as I said, your RRSP withdrawals should try to be a last resort.
OK, now, you mentioned life happens. What if you want to withdraw some of that money to buy, for example, a home or to pay for education? Are these scenarios a little different?
They definitely are because you do have the right to essentially borrow from your RRSP to purchase a first home or for educational purposes. So you don't have the same consequences if you do that correctly.
OK, now, if you're thinking of withdrawing money from your RRSP, would it be wise to speak first to a professional?
Definitely. If you work with a financial planner, if you work with an investment advisor, please talk to them. If you don't, at least talk to your accountant, and then go into your financial institution because they may have some solutions for you that you may not have thought of. And it's always good to try to get that information before making your final decision.
Great information as always. Georgia, thank you very much for joining us.
Thank you so much for having me.