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Money Should I raid my RRSP to pay off my line of credit?

18:08  08 may  2018
18:08  08 may  2018 Source:   moneysense.ca

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RELATED: Should I cash my RRSP to pay off my mortgage? Not much difference, right? But you’d have to give up ,000 of RRSP capital in the form of tax to wipe out the line of credit .

Comparing an early mortgage payoff versus keeping the mortgage . Pay your mortgage off early. We have four reasons you should not tap your RRSP to become mortgage free. A bit of unsecured line of credit debt isn’t extraordinary in my opinion.

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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.

—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.

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Can someone talk me out of raiding my 401K to pay off an exorbitant level of credit card debt? I should say that I 've been laid off twice in the past 8 years and never had the financial cushion of You need to understand where your money is actually going and if that is in line with your real goals in life.

Creditor insurance on your line of credit can help pay off your debt or reduce your balance in the event of death, or help cover payments in the event of a CIBC RRSP Maximizer Loan. Meet your investment goals by taking advantage of your unused RRSP contributions of ,000 to ,000.

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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.

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.

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Lines of credit offer flexibility and lower interest rates, but does it make sense to take out a different kind of debt in order to get out of debt?

The debt is a line of credit that she is paying 4% on. She’s a widow and has 3,000 in RRSPs . In order to pay off the ,000 in four years, she would need to pay ,400 annually in principal and interest. If withdrawn from her RRSP , she would need to take out at least ,700 to cover this.

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.

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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.

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.

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Should I consolidate my credit cards? Should I use a home equity loan or an auto loan? What will my tax savings be? How large a line of credit can I obtain? Should I pay points to lower the rate?

Today’s question is: Should I use money in my RRSP to pay off debt? The answer depends on If you own an older car that you no longer need, it makes sense to sell it and use the cash to pay off your credit card.

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.

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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.

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I think you should pay off your credit card. Many People wonder about paying off debt vs savin How To Pay Off Your Debt Through Your Credit Line !

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.

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Julia has a DB pension and is maxing out her TFSA. Is an RRSP worth it for her?What is your recommendation for next steps? Should I invest in a non-registered account? Or give in to the RRSP option? My goal is to harness the magic of compounding, so I can be successful in later years.

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