ROB: At what point should one consider dipping into their RRSP’s in lieu of incurring a growing credit card or line of credit debt?
Thanks for the question Robbie.
The function of a Registered Retirement Savings Plan (RRSP) is to defer income tax from higher earning years to lower earning years. The general idea is that you are in a higher tax bracket during your working years in comparison to retirement years.
With that being said, over the last 25 years I have witnessed other situations for which withdrawing RRSP money made sense. In general, life sometimes throws a curve ball and money is needed to regroup. Another scenario I have come across is where the client uses RRSP funds to finance the start of a business. The common theme in the above scenarios is the client has slipped into a lower tax bracket and needs additional money.
I recall one of our clients withdrawing $100,000 of RRSP’s over a two-year period to invest in a franchise opportunity in 1995. A lot of people thought he was crazy – but he believed in the opportunity and was willing to take the risk. Today he has a number of franchises in Western Canada. This young man at the time didn’t gamble his RRSP away – he was a businessman and an entrepreneur with a well thought out plan.
As with any recommendation, a financial planner would require comprehensive information about your situation before giving a recommendation for paying off debt with RRSP funds. For example, the interest rate of the debt, the planned payoff period, and copies of tax returns from the years you contributed to the RRSP’s to compare this tax rate to your current tax rate.
Thanks for reading.