The pandemic has been extremely challenging for everyone. Depending on which industry you are in, it has also been financially draining. Lockdowns and disruptions to daily life have altered the financial stability of countless Canadians. The events, tourism and hospitality industries have been hit the hardest, and if you have been laid off, even temporarily, due to the pandemic, you may be looking for cash to help ease the burden.
FP Canada released a study in September 2020, “Coping with COVID’s Financial Impact” which reported that 30% of Canadians are concerned that they may not financially recover from the affects of the pandemic. In relation to that, 41% of respondents said that they are in a worse financial situation now than compared to before the pandemic. In fact, two in ten Canadians reported that they have dipped into savings to cover money shortfalls and other expenses since the beginning of the pandemic.
We don’t know when things will get back to ‘normal’ (although, we are all hoping it is sooner rather than later).
Are you asking questions about how to handle your financial stress?
One of the burning questions you have might be asking is if you should you dip into savings, more specifically, your Registered Retirement Savings Plan (RRSP) to get you through this hard time.
Even though the pandemic has felt extremely volatile and unpredictable, if you have your portfolio with an advisor or a robo-advisor, more likely than not it has rebounded and possibly even offered some positive returns. If the dollars in your accounts have grown at all, it is probably tempting to consider cashing them out.
This is a big decision, and you’ll want to consider the following things:
You have an RRSP for a Reason
Retirement may feel like it is a long way off, but when you take dollars out of your account you are delaying your long-term plan. Your investments in your RRSPs (cash, stocks, bonds, etc.) grow in your account every year, helping you get closer and closer to a financially secure future, especially in your golden years.
Retirement is an important financial consideration, and you knew that when you set up your RRSP. Using the dollars for non-retirement purposes will put your financial future at risk.
Taxes will hit your savings a lot harder now than in the future
If you decide to withdraw dollars now to help with your money situation, the dollars are not going to go as far as you think. Whatever you take out will be taxed as income. On top of that, you will have to pay a hefty “withholding tax.” This penalty is dependant on the amount you take out. In provinces other than Quebec, there is a 10% penalty on $5,000, 20% up to $15,000 and a whopping 30% on withdrawals over that. Due to this, the savings that you take out will be a lot less than what is in the account.
If you leave your savings where they are, they will continue to grow. When you do decide to retire and start to withdraw funds, you will be taxed, most likely, at a lower tax rate. This means that the dollars from your RRSP in retirement will go a lot further than if you take them out now. Also, when you take money out early, you lose out on tax-free returns.
Contracting your contribution room
Withdrawing RRSP savings before retirement has another immediate downside. You lose your contribution room, permanently. Unused contribution room does roll over year to year, but if you maxed out your contribution room, you won’t be able to make up the difference in later years.
How to weather the pandemic storm
Instead of looking to RRSPs to cover any financial gaps during the pandemic, look to other savings accounts first. Tax Free Savings Accounts (TFSAs) allow tax-free withdrawals. Any withdrawals don’t affect future contribution room. The only consideration for taking money out of your TFSA is that the dollars cannot be returned in the same calendar year.
When should you withdraw early from RRSPs?
If you have been diligently saving for years and you determine that your tax burden in retirement will be the same as it is now, you can take out dollars to weather the pandemic storm. There is no additional benefit for sheltering the dollars if you are in a stressful financial situation and have no other savings to draw from.
Taking dollars out of your RRSP should be a last resort. It’s important to ensure you are making an informed decision and weighing the benefits
Get tips from a financial expert
If you’re concerned that the pandemic is affecting your long-term financial health and you have started to think about dipping into your RRSPs, get advice from a financial expert. Our advisors are here to help put together an effective plan for your future, especially during periods of uncertainty.
Talk to an expert today to prioritize your goals, get advice on investment decisions and build a personalized strategy for a successful financial future.