How to borrow money from your RRSP without getting penalized – National


This article explains the basics of RRSPs and early withdrawals. However, with all financial advice, we strongly recommend that you speak to a professional when planning your personal finances.

A Registered Retirement Savings Plan (RRSP) is one of the most popular ways for Canadians to save for retirement. In 2012, Canadians contributed a total of $ 35.7 billion to RRSPs.

Although these funds are reserved for retirement, many Canadians continue to borrow from their RRSPs for things other than their golden years. According to Statistics Canada, 1.82 million Canadians made early withdrawals from their RRSPs in 2012 (the most recent data available).

READ MORE: Retirement lost – More Canadians cash in their RRSPs early

These early withdrawals could end up costing you dearly, in the form of tax penalties, but what do you do if you are in a financial emergency and need cash fast? Read on for tips on making RRSP early withdrawals and alternatives when you need the cash quickly.

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RRSP basics

An RRSP is an account registered with the Canadian government that offers certain tax advantages over other investment accounts.

Unlike a regular investment account, the contributions you make to your RRSP will not be taxed by the government until the funds are withdrawn later. Investments can grow and accumulate tax free. Since most people will earn less in retirement, the taxes they pay on funds withdrawn from an RRSP tend to be lower than during the richer years. Contributing to an RRSP also gives Canadians tax credits on their annual tax return.

The tax benefits offered by RRSPs are how the government encourages Canadians to save for their retirement. RRSPs are a victory for both future retirees and for the federal government – the fact that many Canadians retire with healthy RRSPs lightens the government’s burden of providing for retirees.

“Government pensions are not enough to retire,” said Bruce Barran, CPA, CA, partner at Davis Martindale LLP. “You need to plan for retirement in advance, and RRSPs are a great way to save for retirement. “

The government wants you to use your RRSP for retirement, not vacations and shopping sprees. To this end, provisions are in place that make early withdrawals from your RRSP expensive.

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What happens if you make early withdrawals from your RRSP?

There are a few scenarios where this is allowed (including the Home Buyers’ Plan and the Continuing Education Plan – more information below), but beyond those, if you opt out of the plan. money from your RRSP sooner you will be penalized. Early withdrawals are subject to withholding taxes, which means your financial institution will withhold tax on the amount you withdraw and pay it directly to the government. The tax rate ranges from 10 to 30 percent, depending on how much you purchase and where you live.

Withholding tax rate in Canada:

  • 10% (5% in Quebec *) on amounts up to $ 5,000
  • 20% (10% in Quebec *) on amounts over $ 5,000 up to $ 15,000 included
  • 30% (15% in Quebec *) on amounts over $ 15,000

* Residents of Quebec are also subject to provincial withholding tax.

So let’s say you want to withdraw $ 25,000 from your RRSP to buy a new car or renovate your kitchen. The withholding tax applied would be $ 7,500 (30%), so you will only get $ 17,500.

In addition, when you make an early withdrawal from your RRSP, you permanently lose the contribution room for these funds. If you have withdrawn $ 10,000 early, you will never be able to contribute again, which reduces the potential value of your total RRSP in retirement.

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How to borrow money from your RRSP without being penalized

There are two ways you can make an early withdrawal from your RRSP without breaking the bank: the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP).

The HBP allows you to borrow up to $ 25,000 from your RRSP to buy or build a house. To take advantage of the HBP, you must be a first-time home buyer or not have owned a home in the past five years and you must repay the money within 15 years. To learn more about the rules surrounding the Home Buyers’ Plan, consult the Canada Revenue Agency.

You can also borrow from your RRSP to finance your studies or that of your spouse thanks to the Continuing Education Plan. The LLP allows you to borrow up to $ 10,000 per year, up to a total of $ 20,000. To participate in the program, the student must be enrolled full-time in a qualified program. You will have 10 years to repay the money without being taxed.

The LLP cannot be used to fund your child’s education. To learn more about the rules surrounding the Continuing Education Plan, consult the Canada Revenue Agency.

Another scenario where it might make sense to borrow from your RRSP is if you are in a lower tax bracket than when you first contributed to your RRSP.

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“If you don’t work for half the year, your tax bracket would be lower, so withdrawals would be taxed less,” said Gary Tymoschuk, vice president of operations at the Credit Counseling Society.

Alternatives to early RRSP withdrawals when you need the cash

If you need money for anything other than retirement, buying a home, or financing your education, withdrawing from your RRSP early is not recommended.

“People should be very careful before withdrawing from their RRSP – it’s a savings for your future. You may not have enough time before retirement to hand over the money, ”Tymoschuk said.

But what do you do when you find yourself in a dire situation after losing a job or getting sick, for example.

In a financial emergency, you may want to consider tapping into any non-registered assets you hold, such as savings bonds or guaranteed investment certificates (GICs). While these investments suffer, no tax-sheltered benefit is at risk.

Another option is Tax Free Savings Accounts (TFSAs). Registered accounts save Canadians up to $ 5,500 per year and unused contribution room rolls over to subsequent years. TFSAs allow you to save money tax-free, and withdrawals are tax-free as well. Just be sure to follow the refund rules closely, or you could be subject to a tax penalty.

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READ MORE: 5 Dos and Don’ts about Tax-Free Savings Accounts

One of the reasons many Canadians use their RRSPs is to pay off their debts. Rather than borrowing from your RRSP, you could continue to contribute and use the repayment to pay off your debt.

If you have multiple debts, try getting a consolidated loan where you only have one payment at a much lower rate.

READ MORE: Snowball or stacking? How to pay off your credit card debt

Another option to consider is a line of credit. A personal line of credit will allow you to borrow a certain amount of money, but unlike standard loans, you won’t be charged interest until you actually use the money. The interest rate on a line of credit is generally lower than that of most credit cards. One strategy is therefore to open a low-interest line of credit to pay off your high-interest debts.

But beware: lines of credit can be easily misused, and if you can’t curb your urge to charge your card, you could easily find yourself carrying more debt.

In 2011, David Chilton, author of The rich barber and The rich barber returns, called lines of credit “the worst thing that has happened to Canadians in the past 20 years.” Once you have paid off the money borrowed from your line of credit, that money becomes available again. Non-essentials like cars and vacations can be too tempting for some. If you use a line of credit to pay off your credit cards, pay them off and cut the cards to avoid the debt cycle.

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“When you are in desperate need of money, people have to think long and hard about the best option for them,” Tymoschuk said. If you are going to borrow, whether through a line of credit or a home equity loan, he suggests that you compare all of your different options and look for the lowest interest rate.

If you need to replace your roof, for example, take a look at your savings accounts and things like GICs first, Tymoschuk said. At the other extreme, avoid paying with a credit card. You have to ask yourself “what are the costs of borrowing and what are the terms,” ​​Tymoschuk said.

Note: This feature is for exhibition and informational purposes; it is not meant to be viewed as personalized or expert financial advice.

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