Should you withdraw from RRSPs to pay debt?

If you are carrying debt outside of a mortgage or vehicle loan, you might be considering a withdrawal from RRSPs to pay your other debt.

RRSPs are intended to provide tax sheltered savings for retirement.  Considering many Canadians do not have pension plans through their employer, the decision to cash RRSPs to pay debt should not be taken lightly.  If you were retiring at age 65 in January 2024, the maximum monthly amount you could expect from CPP is $1,364.60, however the average CPP benefit being paid as of October 2023 is only $758.32 per month.  How long you work for, whether you draw CPP before age 65, and whether you made maximum CPP contributions throughout your career will determine how much CPP you will qualify for.  Besides CPP, upon reaching age 65, you may also qualify for Old Age Security (OAS), however it pays a maximum benefit of $713.34 per month, as of January 2024.  Some might qualify for additional benefits through the Guaranteed Income Supplement (GIS) program; however, government retirement benefits alone were never intended to cover 100% of your living expenses during retirement.  If you begin retirement with a mortgage and other debt to service, relying on government retirement benefits alone will likely not be sustainable, so having some form of personal retirement savings is imperative; especially if you want to remain in your own home as long as you can.

Before withdrawing funds from an RRSP to pay debt, you must consider your marginal tax rate as RRSP income from withdrawals is taxable.  To illustrate, let’s assume you earn $60,000 per year, gross before deductions, reside in New Brunswick and owe $25,000 on credit card and other debt that you just cannot seem to pay down quickly.  The marginal tax rate for someone earning $55,868 - $99,916, gross, is 34.5%.  Therefore, if you already earn $60,000 per year, gross, from employment, a withdrawal from your RRSP will be subject to a marginal tax rate of 34.5%.  As a result, if you intend to pay off $25,000 in debt, you will need to withdraw approximately $39,000 from your RRSP to net $25,000 after taxes to pay off your debt.  Even if you cannot afford future RRSP contributions and assuming you are 40 years-old, leaving the $39,000 in your RRSP until age 65 could amount to approximately $286,000, if you earned an average return on investment of 8%, after 25 years.

Before withdrawing funds from RRSPs to pay debt, it would be a great idea to explore other options for debt relief.  In a Bankruptcy or a Consumer Proposal, RRSPs are protected from creditors and therefore are yours to keep, however, these options would only make sense if you had no other options to consolidate your debt at a reasonable rate of interest – assuming you could afford the consolidation loan payments.

If you are looking for advice, or a second opinion about your debt, it does not cost anything to talk about your options.  Every financial situation is unique and viable options can differ from person to person.  A conversation free of judgment and cost, is the first step to determine options for debt that make sense for you.  For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.