A lot of people are raiding their RRSPs for emergency funds—even though that means a big tax hit
By Katrina Caruso
Canadians withdrew an average of more than $20,000 from their RRSPs last year—almost $4,000 more than the 2016 average, according to a Bank of Montreal survey. Almost two-thirds (64%) of respondents said they had used retirement savings to pay for living expenses, deal with an emergency, or pay debt.
According to a December 2017 online survey of 1,500 adults commissioned by BMO Financial Group, 40% of Canadians have made a withdrawal from their RRSP.
The average withdrawal in 2017 was $20,952, 22% more than the 2016 average of $17,213. The lowest withdrawal average was $12,374 in the Prairies and the highest was $23,505 in Atlantic Canada. In the Prairies, the No. 1 reason for withdrawals was living expenses, while the folks on the east coast cited buying a home as the most common reason.
Using RRSP money to buy a home was in fact the No. 1 reason nationally, cited by 27%, and it’s not necessarily a bad idea. A program called the Home Buyers Plan (HBP) allows for tax-free withdrawals of up to $25,000, but the money must be paid back over 15 years. (Another program, the Lifelong Learning Plan (LLP) can allow for RRSP withdrawals of up to $10,000 a year for education or training; the withdrawal is tax-free if paid back over a 10-year period.)
The second most commonly given reason for a withdrawal was paying for living expenses (23%), with emergencies and paying off debt coming third and fourth (21% and 20%). These withdrawals create a problem.
Raiding your RRSP should be a last resort, because that money counts as taxable income. You’ll pay the same amount of tax on it as on the rest of your annual income, and you could even be increasing the rate of tax you’ll pay on your whole income by boosting that income by the amount of your RRSP withdrawal.
According to the BMO survey, more than one-third of respondents aren’t making RRSP contributions this year, 44% of them saying that they can’t afford to.