Think Twice Before Cashing In Your RRSP To Pay Off Debt

Posted in Debt Help
Posted by Joel Sandwith, BA - LIT

RRSP-debt-repayment-updatedYou’ve used your credit cards a few more times than you thought and now looking through your statements, the balances are much higher than you’ve planned for. When you add it all up, paying only the minimums will to take you 42 years and nine months to pay off the total amount.  To top it all off, you just lost your job and you know it’s going to take a few weeks or months to get a new one. You have missed a few payments on your credit cards and line of credit, and the phone seems to ring every day with a creditor or collection agency asking when and how much you are going to pay them. The car loan needs to be paid and the next mortgage payment is coming due.

Panic sets in and you wonder where you’ll get the money for all these payments?

Does this sound like you or someone you know? This kind of scenario is common for individuals facing overwhelming debt. Not knowing where to start or how you will get the money to pay down your debt can lead to stress and anxiety; taking a toll on your family and emotional well-being. Many people will consider cashing out their investments, such as an RRSP, to pay down their debt and make financial obligations more manageable.

Although this seems like a good idea, here are a few reasons why cashing in your RRSP is not the best solution for paying off your debt:

  1. The money that you would be using from your RRSP to pay current debts has been sheltered from taxes and was intended for use in retirement. Since the money in your RRSP was sheltered when you put it in, now it will be added to the income you make this year, and you may find that you owe quite a bit more in taxes than you expected. By using the money to solve one problem, you have created a new tax debt once your file your income taxes.
  2. When money is taken from an RRSP for reasons outside of purchasing a first home or for retirement, the money is taxed and you will not receive the full sum. This means that you will have less money to deal with your debts and you have lost a part of your savings to the government.
  3. By putting your retirement savings toward debt repayment, you will have to start saving for retirement all over again with less time and money to do so.

So what should you do instead of cashing in that RRSP?

Seek professional advice. Speak to a licensed trustee in bankruptcy to discuss your situation, review all of your options and come up with a plan that’s right for you. By filing a consumer proposal or personal bankruptcy, you are protected from your creditors, will eliminate all or most of your debts and be permitted to keep your investments (minus contributions made in the last 12 months). Furthermore, eliminating your debts in a bankruptcy or consumer proposal can help to rebuild your credit score and provide you with future financial opportunities that you will not have by only paying off a portion of your debts using your RRSP money. During these debt relief solutions, you’ll learn healthy financial habits to ensure that once you get out of debt, you stay out of debt.

When considering debt relief options, it’s important to think long term. Although cashing in an RRSP might seem like a quick fix for getting out of debt, it’s only a band-aid solution that will lead to bigger problems once you’re forced to rely on that savings in retirement.

struggling with debt options to RRSP