Everyone from time to time is carrying excess debt that they’d like to get rid of. A credit card here, car payment there and the interest payments can add up. As Advisors we constantly receive calls from clients who would like to free up some of their debt by using their RRSP savings to pay it off. Our job is always to educate our clients and ensure they make informed decisions.
Before using your RRSP’s to pay off debt you need to consider the following things:
1) Do my funds or account carry any fees? Your investments may carry a “Low Load” or DSC (Deferred Sale Charge). In many cases, your Advisor gets paid by the investment firm you purchase your funds from. If you have Low Load or DSC funds then the fees are a way for the fund company to recoup some of those commissions paid.
2) How much tax will I have to pay up front and at the end of the year?
Each fund company is mandated to retain tax depending on the amount of your withdrawal.
The rules are as follows;
i. $0-$5000 = 10% withholding tax
ii.$5001-$15,000 = 20% withholding tax
iii.$15,001 and up = 30% withholding tax
Each dollar you withdraw will increase your income accordingly. If you take enough, you may jump up an income bracket forcing your income tax rate to be higher.
3) How will this withdrawal affect my Future Value?
The pot of money you are withdrawing from was designed to fund your retirement. So you must consider how this will affect your retirement p picture.
Example: Jane is 30 and needs $5000. Jane plans to retire at age 65. If she assumes a relatively conservative interest rate of 6%, that $5000 will compound into $38,430 by age 65. At 8% it will be close to $74,000.
Our recommendations are simple. Review the facts with your Advisor. Consider the pros and cons of funding debt with RRSP’s. But most importantly, don’t ignore the numbers. In Jane’s case above, a little withdrawal now could significantly hamper her retirement plans later.
Alford & Associates is a family owned and operated financial practice in Brantford, ON. For over 25 years we have helped our clients secure their retirement goals. First and foremost we help you secure your greatest asset… Your Family
www.alfordandassociates.ca (519) 751-0901