For Kimberley Roadknight and other Canadians in financial need, planning for retirement in a recession has taken an unnerving twist: The question isn't so much whether to contribute to an RRSP but whether funds pegged for after-work life should be used for everyday survival.
Financial advisers offer a word of caution: disturbing that nest egg to pay off personal debt or make ends meet should be a last-resort move, mostly because of the tax and retirement-affordability repercussions. But if withdrawing funds is a must, they have ways to lessen the portfolio blow.
Ms. Roadknight, 52, was a 27-year employee at an appliance-manufacturing company in Guelph, Ont., when it shut down last November. Emotionally and financially stressed after leaving her assembly-line job, she was referred to certified financial planner Andrew Dedousis after she contemplated cashing in some of her workplace group RRSP.
“I didn't know what to do,” recalls Ms. Roadknight, a divorced mother of two grown children who is now on employment insurance benefits and is still paying off a mortgage. “I know that in my position, I have to have something for my retirement, but it's quite tough because I know the employment [benefit] doesn't quite make my mortgage.”
Mr. Dedousis, of Meridian Credit Union, guided Ms. Roadknight through the transfer of her $32,000 group RRSP through her employer into a managed, moderate-risk portfolio that is heavy in GICs. He also helped her develop a plan for avoiding an RRSP cash-in – she increased the amortization on her mortgage, thus reducing payments, and pulled together a strict budget that included only making purchases that she really needed. Ms. Roadknight is also holding off on contributing more to her RRSP until she finds work – she's researching the possibility of taking courses in interior design or floral design.
“I feel so good about myself, that I can do what I am doing and not have to dig into my investments,” Ms. Roadknight says. “For people especially in my age group, if you don't have to touch your RRSPs, don't.”
Although Canada is easing its way out of the economic downturn, and markets are starting to recover, “you're still seeing a lot of fallout from unemployment,” Mr. Dedousis says.
He stresses that advance planning – including having three to six months of savings or assets such as savings bonds, money market funds or a tax-free savings account that can easily be cashed in for unforeseen circumstances – can minimize the necessity for an RRSP cash-in.
There are, however, two government programs that allow RRSP cash-ins with no penalties if the funds are put back into the retirement plan within a certain period of time: The Lifelong Learning Plan (LLP) and the Home Buyers' Plan, HBP. Here is a rundown:
| Home Buyers’ Plan (HBP) | Lifelong Learning Plan (LLP) |
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How much can be withdrawn? Withdrawals of up to $25,000, either through a series of withdrawals or a lump sum in the same year, are allowed to buy or build a qualifying home in Canada. Since 1999, the plan also allows plan members to help a disabled relative buy a more accessible home. |
How much can be withdrawn? Up to $10,000 to finance full-time training or education for an individual or spouse. As long as LLP conditions are met every year, amounts from your RRSPs can be withdrawn for up to four years for this purpose, up to $20,000 |
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What are the tax effects? Eligible withdrawals will not be included in income, and RRSP issuers will not withhold any taxes. All withdrawals from an RRSP must be repaid within a period of no more than 15 years. |
What are the tax effects? Withdrawn amounts do not have to be included in your income, and the RRSP issuer will not withhold any taxes. Withdrawals must be repaid to your RRSPs over no more than 10 years. Once an individual begins repayment, no new withdrawals will be permitted until all repayments have been completed. Any amount not repaid in that time frame will be included in the plan holder’s income for the year it was due. |
