Page 41 - Newcom

INSIGHTS 41
An RRSP is not
a rainy
he best advice you’ll get about retirement savings is to make regular, auto- matic contributions to yourRRSP.
The amount you con- tribute can be deducted from your
earned income, and any income from investments in your RRSP will com- pound tax-free. By the time you retire, you’ll probably be in a lower tax bracket than you are now, when you’re working. Funds withdrawn at that time will be taxed at a lower rate.
Doesn’t sound so hard.
Well, life is what happens to you
while you’re busy making other plans. If you have debt or other bills, an
RRSP looks like a ready pool of cash. Should you withdraw funds to pay off debt or a major expense?
Early withdrawals
When you pull funds from an RRSP, your financial institution withholds the tax immediately. The tax rate depends on where you live and the amount you withdraw.
If you’re a Canadian resident, you’ll pay a withholding tax of 10% (5% in Quebec) on withdrawals up to $5,000; 20% (10% in Quebec) on withdrawals of $5,001 to $15,000; and 30% (15% in Que- bec) when the amount exceeds $15,000.
So let’s say you want to take $20,000 out of your RRSP early. The withholding tax applied would be $6,000 (30%). That leaves $14,000.
Additionally, an early withdrawal means you lose the contribution room of those funds permanently. Also, the amount you take out will be added to your taxable income. It could bump you to a higher income tax bracket. The con- sequences of an early withdrawal are steep. There are a couple of special situ- ations where the RRSP withdrawal rules differ: the Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP).
Under the HBP, you can borrow up to $25,000 from your RRSP to buy or build a home. You have to be a first-time home buyer or not have owned a home in the last five years, and you must agree to re- pay the funds into your RRSP within 15 years.
The LLP allows you to borrow up to $10,000 a year to a total of $20,000 when you or your spouse are enrolled full- time in a qualified program. You cannot use an LLP to finance your child’s education.
Another option
An RRSP is a long-term savings plan, not a rainy day fund. For most working Canadians, it’s probably the best way to
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