Here are six clarifications of common misconceptions about debt and retirement.
Not-so-good Idea No. 1: Paying off your debts with your RRSPs
It’s easy to see your RRSPs as money within easy reach. Withdrawing that money to cover your debts, however, is a bad idea. There are a number of reasons why.
First off, you will have to pay a withholding tax. That means that at the moment you withdraw money from your RRSP, your financial institution will withhold part of that amount to remit to the government. This estimated tax amount (around 30% of the amount withdrawn) will go to the federal and provincial governments.
Then at the end of the year, you will have to declare the amount you withdrew as part of your income. This means you might have to pay even more tax on the money you take out.
Second, the Bankruptcy and Insolvency Act makes RRSPs unseizable for creditors. The goal of this act is to protect the retirement of anyone facing overindebtedness. This act specifies that RRSPs must never be used to pay debts. Their purpose is to ensure you enjoy a good quality of life during retirement.
Essentially, digging cash out of your RRSP means slashing your retirement fund. The moral: Protect your RRSPs! If you don’t, you’re putting your future at risk.