•   
  •   
  •   

Money When RRSP withdrawals for debt repayment is a bad idea

09:40  02 december  2017
09:40  02 december  2017 Source:   moneysense.ca

10 ways to save more and pay down your debt

  10 ways to save more and pay down your debt Simple strategies to boost your financial knowledge (and your bank accounts) while easing your debtsIf you’re serious about saving you need to set a goal so you know what you’re saving for. Whether it’s a trip to Japan you hope to take in a few months or saving for retirement, having a very specific goal will help you stay motivated and on track.

When using RRSP money for debt is a bad idea . With regards to your RRSP withdrawal plan , I think it’s important to clarify that the withholding tax is not the final tax on your withdrawal .

Repaying an RRSP withdrawal from the Lifelong Learning Plan doesn't have to start until five years after the first withdrawal . Once your repayments begin, you will have 10 years to pay the money back to your RRSP before the opportunity to replace these funds is lost entirely.

Click here to see more personal finance questions answered.© Used with permission of / © Rogers Media Inc. 2017. Click here to see more personal finance questions answered.

Q: My wife and I currently have a mortgage of $297,000. On top of that we’ve had to dip into our line of credit (unsecured) to the tune of $44,000. I’m trying to determine whether or not it makes sense to withdraw the $44,000 – plus the withholding tax – from my RRSP.

I currently participate in a DB pension and am in a fairly safe/steady employment position. My RRSP is currently sitting at $150,000 and my salary is approximately $115,000.

Re-financing is going to cost quite a bit and wouldn’t necessarily cover the full debt load.

St. Clair College has seen 600 students withdraw since strike ended

  St. Clair College has seen 600 students withdraw since strike ended St. Clair College has seen 600 students withdraw since strike endedThe deadline for withdrawing and receiving a full refund is Dec. 5.

When a loan goes bad , the asset is removed from the books and the allowance for bad debt is charged for the book value of the loan. An allowance for bad debt , also known as an allowance for doubtful accounts, is a valuation account used to estimate the portion of a bank's loan portfolio that may

Another sign that debt consolidation loan is a good idea is when you have a stable source of income. In case you think that debt consolidation loan is a bad idea , do not worry because there are still option to consolidate your debt without getting a new loan.

—Tom

A: I don’t want to be one of those judgemental financial experts who tells you that if you have had to dip into your line of credit to the tune of $44,000, you’re spending too much money. Life happens and sometimes there are expenses that go beyond our budget. Obviously if you guys are continuing to run up your line of credit balance though, that’s not sustainable forever, Tom. But you know that.

With regards to your RRSP withdrawal plan, I think it’s important to clarify that the withholding tax is not the final tax on your withdrawal. An RRSP withdrawal is fully taxable income and gets added to your other income for the year when determining tax payable on your tax return. Tax already withheld gets credited, but you will owe more tax over and above.

St. Clair College has seen 600 students withdraw since strike ended

  St. Clair College has seen 600 students withdraw since strike ended St. Clair College has seen 600 students withdraw since strike endedThe deadline for withdrawing and receiving a full refund is Dec. 5.

If you're considering making an RRSP withdrawal to pay off debt , think again. The tax bill and loss of savings might not be worth it in the end. For me, this extends even to a home mortgage, which is why I often say “the foundation of financial independence is a paid-for home.”

Early withdrawals from registered retirement savings plans ( RRSPs ) are increasingly common, but are they smart? And withdrawals from a spousal RRSP can carry additional risks. If you’re making ongoing contributions to a spousal RRSP and your spouse withdraws funds, depending on the timing

Ask a Planner: Leave your question for Jason Heath »

You have an income of $115,000 and you’re in a pension plan, so I’ll estimate your taxable income at $105,000 after pension and other deductions, Tom. If you want to have $44,000 after tax from your RRSP withdrawal, you will probably need to take a withdrawal of about $80,000 from your RRSP. It could be more or less depending on the province you live in. In Ontario, it would be about $81,000. In Quebec, about $86,000. And in Saskatchewan, only about $76,000.

READ: 10 ways to save more and pay down your debt

In the same way claiming a tax deduction from an RRSP contribution can be great when you have a high income, taking withdrawals when you have a high income can be terribly taxing. So, Tom, you may need to take out nearly twice as much from your RRSP as you need to be left with what you want after-tax.

I suspect your line of credit interest rate could be 6-8% if it is an unsecured line of credit. You may not be able to generate an 8% RRSP return over the long-run, but 4-5% in a balanced portfolio or 6-7% in an aggressive one may not be unrealistic. If you were contemplating a TFSA withdrawal, with no tax payable, I’d be all for swapping investments for debt repayment. But let’s do some quick math on the assumption that you’re an Ontario resident contemplating an RRSP withdrawal.

When you break up a year after buying a condo together

  When you break up a year after buying a condo together Should you let your ex buy you out of a mortgage—especially when you live in Vancouver?0000

Withdrawals from an RRSP account is added as income for the year which is then taxed at your marginal tax rate. To help pay for this year end it was just 3 yrs ago when i started rrsp .i contribute small amount to start with as i only have small income..my debt is more than my income..it was a bad

Experts warn that plunging deep in debt with an RRSP loan to max out their contribution room can be a very bad idea . “It is a good idea to do a combination of both and to look at each individual situation and decide what ratio goes to debt repayment and what ratio goes to savings .”

You’d need to take a withdrawal of $81,000 from your RRSP to have $44,000 after-tax. Let’s say you are giving up a 4% return on your $81,000 in investments – that’s $3,240 per year. Let’s say your $44,000 line of credit is at 8% interest – that’s $3,520 per year. Not much difference, right? But you’d have to give up $37,000 of RRSP capital in the form of tax to wipe out the line of credit.

MORE: Paying off the line of credit

I think I would be much more inclined in your case to continue to plug away at debt repayment, Tom. If you could consolidate your line of credit into your mortgage, that would be ideal as you could bring your interest rate down. If it means you don’t pay your debt off for longer or even into retirement, you may be better off in the long run by not raiding your RRSP in a high income, high tax year.

Given you have a DB pension, you may have a fairly high income in retirement as well, but likely nowhere near what your income is now. Plus, in the meantime, you will have a bigger RRSP growing more and more over time that you can strategically withdraw in retirement.

Cashing in investments to pay down debt is well worth considering if those investments are non-registered or TFSA investments. But when it comes to RRSP withdrawals, I think you need to have a low income to make it a viable solution, Tom. You should contribute to RRSPs in high income years, not withdraw, unless there is an incredibly extraordinary situation. A bit of unsecured line of credit debt isn’t extraordinary in my opinion.

'We're in debt with karma': Wave of support overwhelms young Edmonton family facing stage 4 cancer

  'We're in debt with karma': Wave of support overwhelms young Edmonton family facing stage 4 cancer A new Edmonton father and his family are overwhelmed by support they've received from the community after finding out he has Stage 4 cancer. "I know he will recover," she said. "I'm hoping.

Discover what happens to your contribution room when you withdraw from your Registered Retirement Savings Plan ( RRSP ), and the RRSP Withdrawal Rules. Withdrawing money from an RRSP before you reach the age of 71 is possible, but you’ll have to pay tax unless you’re using the

Repayment is the act of paying back money previously borrowed from a lender. Repayment is typically executed through periodic payments that include part principal plus interest. The specific loan contract might also reveal options for a borrower who is unable to repay loans.

Ask a Planner: Leave your question for Jason Heath »

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

MORE FROM A TAX EXPERT:

  • How you’re taxed when selling a business to family
  • How much tax do I owe on the sale of collectable wines at auction?
  • Owning Canadian stocks as a U.S. resident
  • Will gifting a home avoid U.S. capital gains tax?
  • Pay less tax on rental properties
  • What taxes do my LIRA beneficiaries have to pay?
  • Paying taxes on an inheritance
  • How can my stock losses be used to lower taxes?


RRSP Alert: 2 Top Canadian Dividend Stocks to Own for Decades .
Here's why Canadian National Railway Company (TSX:CNR)(NYSE:CNI) and Enbridge Inc. (TSX:ENB)(NYSE:ENB) deserve a closer look.CNI

—   Share news in the SOC. Networks

Topical videos:

This is interesting!