As a result of COVID-19, many people are faced with the prospect of lay-offs, business closures, and general uncertainty as to how bills will be paid and how personal finances will be managed long-term. If you did not have a proper emergency fund, you may be looking towards your savings or investments to bridge any lost income. While generally, this is a smart idea, there is one type of savings that may hold future consequences if you decided to withdraw funds from it early on: your RRSP.
A savings or investment account that many Canadians have is a Registered Retirement Savings Plan or RRSP. Generally, RRSPs are intended to provide tax-sheltered savings for retirement. Withdrawing money from retirement savings without a valid reason is essentially taking money from your future self, as most Canadians do not have pension plans through their employer to help finance retirement and cannot solely rely on government assistance like the Canadian Pension Plan (CPP) and Old Age Security (OAS).
As an example, for 2019, the maximum CPP retirement benefit is $1,154.58 per month. However, many collecting CPP now, do not qualify for the maximum benefit. Old Age Security (OAS) provides a maximum benefit of $607.46 per month. Some might qualify for additional benefits through the Guaranteed Income Supplement (GIS) program, however, government retirement benefits alone were never intended to cover 100% of a retiree’s living expenses. If someone enters retirement with a mortgage or other debt, it would become increasingly difficult to stay afloat on government funds alone. Therefore, it is important for all Canadians to have some form of personal retirement savings.
The risks of using your RRSP for extra cash
As we all manage through this pandemic, it is imperative that we can cover at least our basic needs (food, rent, medicine, etc.) while we wait for the devastating effects of the pandemic to subside. Before using your RRSP to cover these expenses, try other alternatives like finding costs to cut in your budget, looking at other savings accounts you may have and looking into government benefits and deferral programs such as mortgage payment deferrals. However, if you have exhausted all other alternatives and your only option is to withdraw funds from an RRSP to pay for necessities for your family, you should still take pride in knowing you had the foresight to save funds in the first place.
If you must withdraw funds from your RRSP it is important to only withdraw what is absolutely necessary and strive to replace the funds withdrawn as soon as the pandemic subsides, and you get back on your feet. On top of making sure you reinvest what you withdrew from your RRSP, it’s also important to remember that funds withdrawn from RRSPs are taxable income. In order to derive the maximum benefit from RRSPs, it is best to delay withdraws until your earned income from other sources has dropped substantially or ended (i.e., you’ve retired). Taking RRSP withdrawals while you have work or other income earned during the same tax year will lead to additional taxes on the withdrawal.
When it comes to saving for retirement, time is your best friend! So, it’s best, if possible, that you invest those funds and do not touch them until you are retired. To illustrate, a 25-year-old who starts saving $100 per month, earning an average investment return of 7% is projected to have $331,000 by the time they reach 65. Similarly, a 45-year-old who starts saving $100 per month, earning an average return of 7% would have a balance of $66,000 by age 65. If these same people were forced to withdraw their RRSP funds early and resume savings later in life, it would have detrimental effects on their projected balance at age 65.
Obviously, during these challenging times, it is important to do what you must to provide for your family. Therefore, if you have no other options than to dip into your RRSP, do so. However, if you have an alternative option that doesn’t require you to accrue more debt through a high-interest loan, I would highly recommend exploring that first before using your RRSP. I promise that your future self will be thanking you for it.
If you have any questions surrounding the temporary financial relief programs and options available to you, do not hesitate to reach out to our team. Our Licensed Insolvency Trustees and debt solutions professionals are knowledgeable, non-judgmental and happy to walk you through your options virtually during COVID-19.