A Major Downside of Withdrawing from an RRSP to Pay Off Debt
It’s not just the $25,000 you lose, but the $25,000 future growth.
At age 30, with 35 years compounding to age 65, your $25,000 will grow to $192,152 at 6% and $510,349 at 9%.
Play around with this calculator to see what happens when you change returns and time horizons.
I know you may think you plan to start saving again once you pay off the bills, and in five years you’ll have the $25,000 again. If you do that, in 30 years the $25,000 will grow to $143,587 at 6% and $331,692 at 9%.
Of course, that’s assuming you tackle your cash flow problem, actually save the $25,000, and then never cash it in again to pay another round of unexpected bills.
Also, the tax implications of early withdrawal from an RRSP
Know that RRSP withdrawals are fully taxable and $25,000 will be added to your income. The advantage of RRSPs is that the money is not counted as income for the tax year in which you make your deposit, and you make withdrawals when your income is much lower, such as when you retire.
So if you make $75,000 this year, the extra $25,000 from your RRSP will push your taxable income to $100,000, which will likely push you into a higher next tax bracket.
In addition, RRSP withdrawals are subject to withholding tax. The financial institution that maintains your account will take money from you and send it to Ottawa as a prepayment for your annual tax.
This post Can I withdraw from RRSPs to pay bills? was original published at “https://www.moneysense.ca/save/investing/rrsp/early-rrsp-withdraw-to-pay-debt/”