It sounds tempting, but you should never, ever borrow from your RRSPs before retirement. Here's why.
We deposit funds into our registered retirement savings plans (RRSPs) to ensure security and comfort when we stop working. But sometimes, we're tempted to withdraw some of it early. Whether it's for a personal indulgence (part of a down payment on a vacation property, a new car) or an unforeseen financial crisis (bad investments, a lost job), the money seems like it's just a phone call away to deal with whatever's at hand. It all appears so enticingly simple. But there are some pretty severe consequences to withdrawing from RRSPs before you retire (for anything other than education or a first home, which is not penalized). Here's what you should know.
First and foremost, you'll get taxed—twice. Depending on how much you withdraw from your RRSP, up to 30 percent will be held back. Then, come tax time, you'll have to add the amount withdrawn to your total taxable income, which might put you into a higher bracket requiring you to pay more income tax.
You'll also lose out on interest. Retirement savings currently yield about five to eight percent interest annually, which adds up! It could be the difference that enables you to enjoy the retirement lifestyle you want.
Additionally, if you've maxed out your contributions, you won't be able to put the money back into your RRSP when you're feeling financially stronger. That means your RRSP ceiling will be that much lower when you retire.
In short, you should never withdraw from your RRSPs early, but if you've already done so and are wondering what your next step is, speak with your financial planner about maximizing current investments as well as future contributions. You may also wish to speak with a nonprofit credit counsellor about creating an overall spending plan in order to put additional funds toward retirement. All in all, you should save as much as possible to enjoy the golden years you always envisioned. Your future self will thank you.
How to make RRSP contributions easy-peasy and prosperous
1. Instead of panicking every February about coming up with a lump sum to deposit (or having to borrow money) before the RRSP donation deadline, arrange to have funds automatically withdrawn from your paycheque or your bank account each month. You'll take advantage of dollar cost averaging (spreading the cost over time instead of buying a product at a fixed point in time, which could be more expensive). Plus, max out an employer matching program. (It's free money!)
2. Deposit any raise or bonus you receive straight into your RRSP. Your expenditures don't need to increase with every raise.
3. Take control of your retirement by taking control of your money. If you don't know a lot about retirement planning or you're uncomfortable talking about it, educate yourself: Read books and blogs, listen to podcasts and talk to a certified financial planner.