Should I use my RRSP to get out of debt?
Are you struggling with debt or you work in a job that has been severely impacted by repeated and lengthy Covid shutdowns? Are you looking for ways to deal with your credit card and other debts? With the Ontario economy just beginning to re-open, it could be a while before you can work on getting out of debt. Banks and credit card companies are back to using normal collection tactics and the pressure is back on.
Collection agencies that tell you to use your RRSP are paid on commission and are only looking out for themselves. As Licensed Insolvency Trustees, we are bound by federal law to discuss all of your options, make sure you understand them, and help you choose the one that is right for you even if it doesn’t involve us. We offer free consultations and you can trust the advice you get from a Licensed Insolvency Trustee like Vine and Williams.
3 Reasons why you should not use your RRSP to pay your debts:
- When you withdraw funds from your RRSP, withholding tax of 10 – 30% will be deducted and paid to the government on your behalf. This may not be the end of it for taxes owing. The full amount of the withdrawal is added to your taxable income in the year you withdraw it. That makes your taxable income higher and can push you in to a higher tax bracket. The tax withheld may not be enough even if it was 30% and you may still owe more income tax when you file your return.
- The higher taxable income may also reduce or disqualify you from receiving other income tested benefits like Child Tax Benefits, GST credits, provincial tax credits or the Guaranteed Income Supplement (GIS) for seniors. This can be a devastating reduction in your income for a full year.
- You permanently lose RRSP contribution room when you make a withdrawal. Unlike the rules for Tax Free Savings Accounts, you can’t just put the money back in. Any replacement contributions count against new contribution room.
RRSP’s are protected
Your RRSP is a protected asset that your creditors can’t get at. Your RRSP is for your retirement, it’s not available to your creditors, and it’s not intended for you to use to pay your creditors. Even in a bankruptcy, your RRSP is exempt from seizure except for contributions made in the 12 months prior to bankruptcy. This 12 month rule is to prevent you from stashing all of your money in an RRSP to keep it from creditors, and then immediately turning around and filing bankruptcy or a consumer proposal. The protection given to RRSP’s under the Bankruptcy and Insolvency Act levels the playing field for someone who saves for retirement in an RRSP with someone who is fortunate to have a locked in employer pension plan. Both types of retirement savings are protected.
What can you do instead?
You can file a consumer proposal to pay your creditors a portion of what they are owed over a maximum of 5 years. Creditors can’t opt out as long as the majority vote in favour, so it is more effective than you trying to negotiate with each creditor on your own. All of your unsecured creditors are bound by the terms of the consumer proposal. You can’t pick and choose. The idea is that all of your creditors are treated equally. Only a Licensed Insolvency Trustee like Vine and Williams can help you with a consumer proposal.
Call us now to discuss all of your options: consumer proposal, bankruptcy, debt management plan, debt settlement, refinancing, remortgaging, debt consolidation or even how to “do nothing” if you are judgment proof or your debts are too old to be enforced. We will discuss these debt solutions with you and point you in the right direction if you don’t need us.
Unlike some of these debt solutions, we deal with all of your debts including tax, government debts, rent arrears, student loans and we have the legal power to stop all collection activity. You can have one monthly payment that fits in your budget to deal with all of your debts.
Call or email for free advice
Call Vine and Williams, Licensed Insolvency Trustees, for your free, no obligation consultation to learn more about how to deal with your debts without using your RRSP’s. Call 1-833-808-8463 to talk with us or Contact Us to request further information by email.