When deciding on a debt management strategy, you may be tempted to borrow from your RRSP or to skip contributions altogether. But are these the best strategy? Consider the four elements of an RRSP before deciding.
R: Registered
RRSP are savings plans that are registered with the federal government to help you save for retirement while also receiving tax advantages. These advantages include:
not paying income tax on your RRSP contribution,
potentially reducing your yearly taxes, and
not paying income tax on any growth of the RRSP until it is withdrawn.
RRSP Tip # 1: Use RRSPs to lower your current tax load and to save for your retirement.
R: Retirement
Retirement may or may not be a long way off, but any amount of money that you withdraw from your RRSP is money (plus its possible interest) that will not be available for you when you are no longer receiving a regular paycheck. Furthermore, you will have to pay a withholding tax as well as income tax on the withdrawn amount.
RRSP Tip # 2: Do not withdraw money from your RRSP to pay off debt.
S: Savings
An RRSP is indeed a savings plan, but it is not intended to be used as a traditional savings account. It is meant for long-term, tax-advantaged retirement savings. The only times you should borrow from your RRSP are when:
you are buying a home after not owning one for five years,
you are going back to school, or
your income is low due to unemployment or sick leave.
There are special borrowing plans for the first two circumstances, while the third allows you to withdraw from your RRSP at a lower rate than usual. Also, you will not be highly taxed on this “income.”
RRSP Tip # 3: Withdraw from your RRSP only in specific debt management circumstances.
P: Plan
Debt management and saving for retirement both require planning. A licensed insolvency trustee can help you create a balanced approach that will help you deal with the rising cost of everyday living expenses, emergencies, and the future. An advisor can help you find debt solutions that will allow you to keep your assets, including your RRSP. They can also help you find ways to use your RRSP to help alleviate your debt. These include:
adjusting your monthly income to reflect your RRSP contribution, and
taking advantage of RRSP top-up benefits at work.
Both these options provide you with more disposable income to pay down debt without negatively affecting your retirement savings.
RRSP Tip # 4: Seek debt management or credit counselling.
RRSP Debt Management Strategies
Further RRSP tips and debt management strategies are available through D. & A. MacLeod Company Ltd. Our licensed insolvency trustees can help you find solutions that will allow you to pay down debt without jeopardizing your retirement fund or paying extra fees or taxes. Contact us today to set up a no-obligation consultation either in person or virtually. Let us help you find a new beginning™.
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