We get this question asked of us every day as a possible debt solutionto get out of debt fast. However, RRSPs are meant for our retirement and not to be used to become debt free. RRSPs can be liquidated at any time but individuals with locked in pension plans don’t have this option which is a good thing in order to protect their future income for their retirement years.
Before withdrawing money from your RRSP, you should consider the following:
(a) RRSPs are intended to save for retirement. Every dollar you withdraw today is a dollar that won’t be available when you retire.
(b) Funds taken from an RRSP will be considered income in the year in which it is withdrawn. The institution will withhold income tax based on a sliding scale, but depending on your income, this may not withhold sufficient tax. This could leave you with a large tax bill at the end of the year.
(c) Depending on the amount that is withdrawn from the RRSP, your increased “income” for the year may bump you into a higher tax bracket, which would increase your overall amount of income tax.
(d) RRSPs are exempt in a proposal or bankruptcy (except for contributions made in the last 12 months). This means that if you file a proposal or go bankrupt, your RRSP will not be affected. If you have already withdrawn RRSP funds to pay debts and later file a proposal or go bankrupt, those funds are gone – your Trustee cannot get them back. However, the Trustee could help take care of the income tax liability created by the RRSP withdrawal.
Grant Thornton provides advice and solutions to individuals and businesses experiencing financial difficulty and reviews all the alternatives to bankruptcy. For Thunder Bay Bankruptcy, Dryden Bankruptcy, Fort Frances Bankruptcy, Thunder Bay Consumer Proposal, Dryden Consumer Proposal or Fort Frances Consumer Proposalplease contact us toll free at 310-8888 or email us at email@example.com to book a FREE private consultation to review all of your options.