Your Registered Retirement Savings Plan (RRSP) is a tax-deferred account that helps you create a fund for your retirement. This means you should only withdraw the money once you stop working. Otherwise, all the benefits that this account offers will be lost. However, there are certain scenarios in which taking out money from your RRSP makes sense.
If you are thinking about cashing out of your RRSP, chances are your financial advisor is against it. The main reason is that withdrawing money from your account will cause a tax hit. This means the tax value you will have to pay will be greater. That’s why managing your RRSP is based on one simple rule. You put the money on the account when you are in a high marginal tax rate. Then, you take it out when that tax rate is lower.
We understand that there are some cases in which you might consider taking out money from your RRSP. Maybe you are planning to make a big purchase, and you don’t have enough money in your savings account. However, it is usually better to exhaust all your options before cashing out of your retirement account.
Alternatives would include:
- Taking out low-interest loans
- Selling other belongings
- Cashing out non-RRSP investments
There are some exceptions, however. If your reason for withdrawing money from your RRSP is covered by any of the following three categories, consider proceeding. Get more news in forbesnews9.
When to cash out money out of your RRSP
1. The Home Buyers Plan (HBP)
The first scenario in which it could be a good option to withdraw money from your RRSP is to buy a property. Keep in mind that this is an option that will only work with first-time buyers. In this case, he/she should not have owned a house four years before the purchase. Even if this is your first time purchasing a home, we only recommend the HBP if you don’t have enough money for the down payment. This means you have tried everything (personal loans, savings, etc.) before thinking about HBP.
If you decide to take out money under the plan, you can get up to $35,000. You can use that money to either purchase a property or build it from scratch. Remember that the amount you withdraw will be repayable for the next 15 years. These repayments will be considered as a contribution to your RRSP. Keep in mind, this is only a good idea if you put in money regularly into your account and you have a stable income.
In case you are hesitating about the HBP, think about how purchasing a home can benefit you. We know that most people dream about buying a house to settle down and start a family. However, it’s more than that. Owning a property means you will have a high-value asset. In a couple of years, the house you bought will have appreciated in value, which means you will have more gain when you sell it.
2. The Lifelong Learning Plan
Have you ever wanted to learn more skills that will help you advance your career? Or maybe you never had the opportunity to go to college, and now you want to give it a try. We understand that thinking about going back to school is scary, especially if you need to pay for high tuition. But, you shouldn’t let that stop you from what you want to do. That’s why if you are struggling to save money for your tuition, you can use the Lifelong Learning Plan.
The Lifelong Learning Plan is a great alternative to cash-out money from your RRSP account to pay for your tuition. You can also use the plan to pay for any other education costs. Overall you can withdraw up to $20,000, but in a calendar year, you will only have access to $10,000. In this case, the amount you take out will be repayable in the next ten years. This means that, in general, the Lifelong Learning Plan works the same way as the Home Buyers Plan.
If you are considering the Lifelong Learning Plan, we recommend you first look at other options. Check if there are scholarships you could apply to, some companies even offer their employees education loans. Maybe a family member could lend you the money, and you can figure out a payment plan once you are out of school. Compare all your possibilities, and as a last resource, you take out money from your RRSP.
3. Early withdrawal in a lower tax bracket
As we mentioned before, taking out money from your RRSP while you are working is a bad idea. Unless you are considering using any of the plans that we described below. However, there is one last case in which you can take out money from your account. For instance, if you have been working for a couple of decades and you want to take a sabbatical to spend time with your family. You could use some of the money on your RRSP, although it will be fully taxable.
Then, you might be wondering, what is the advantage of taking out the money in this case? Well, this is only a path you can choose in case you had little or no income that year. That way, you will be in a lower tax bracket. This means you won’t have to pay a large amount of tax when withdrawing the money.
Even though being in a lower tax bracket, means you could take out the money from your RRSP. We recommend looking at other options first. Remember that the goal of your RRSP is helping you save money for your retirement.
Final Thoughts
There is no doubt that every Canadian should have an RRSP account and take advantage of all the benefits. Today, there are even some young adults who are opening an RRSP in their early twenties. This means a great part of their generation will have more years to save for retirement. That is also the reason why they should be careful when considering making an early withdrawal. The three scenarios presented in this article are the only ones in which it will make sense to cash out your money. Otherwise, we are sure there are other financing options you could use.
