Coming up Short?
It happens to the best of us.
Unexpected expenses, interruption of income, or a rainy-day fund that was not quite big enough to weather the storm. While it may be tempting to dip into your RRSPs to cover the shortfall, just make sure you fully understand the implications before you do so. Let’s all learn together (we swear it won’t take long.)
RRSPs are not tax free, they are tax deferred. What this means you receive a tax refund when you contribute to them, but you are liable for taxes when you withdraw. Withdrawing from an RRSP while still working may create a large tax burden as the withdrawal is taxed at your marginal tax rate. This can cost quite a chunk of change! On top of that, the contribution room you used is permanently gone, which affects your ability to contribute again in the future. Good to know!
If you need funds ASAP, it’s good to explore all your options and consider the long-term effects. For example, if you need to cover a $5,000 car repair, the interest paid on a loan is often less than the tax bill from an RRSP withdrawal. That’s not even considering the lost growth that would have been accruing on those funds had they remained invested over the period you needed them!
Your savings are there for those emergency situations and believe us, we know that life happens and sometimes you need to cash in. It’s good to make sure you explore all your options and talk to your financial advisor before dipping into the cash so that you come out on the other side feeling fantastic about your decision and ready to hit the ground running.