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:
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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. |
"Unless it's for something like the existing plans that allow you to replenish the fund, [RRSP withdrawals]should really be done as a last resort," says Keir Clark, a Fredericton, N.B.-based senior wealth adviser with Clark Wealth Management Group and branch manager at ScotiaMcLeod.
Of the many reasons to resist emergency RRSP withdrawals, these are the most prominent: The institution holding your investments withholds taxes (10 per cent up to $4,999, 20 per cent from $5,000 to $14,999, and 30 per cent for $15,000 and over, with higher fees in Quebec) for remittance to Ottawa, because money taken out of an RRSP is considered taxable income.
What was cashed in as income must be claimed on the following year's tax return, increasing net income. The benefit of tax-deferred compounding on the amounts withdrawn are irretrievably lost, and that lost contribution room can't be made up.
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Taking out money in a year when an individual has little or no other income will probably not involve much of a tax liability. However, one may end up owing more money to the government in taxes when the cashed-in RRSP income is added to overall income, depending on the marginal tax rate.
Robert Mighton, an accredited financial adviser with Royal Bank in Toronto, says that while each RRSP holder is different, there are few good reasons to dip into a plan - and Canadians appear well-versed on that.
"I manage 375 to 400 clients, and I had only three during this market meltdown who said they thought they were desperate and needed to take some money out," he says. "I said to them, 'Come in and let's talk,' and we in fact did only one redemption after talking about the alternatives.
"You have to consider first of all the long-term consequence of taking money out of your retirement nest egg … You have to weigh the immediate benefit versus the future detriment, and it's very costly."
Al Nagy, a certified financial planner in Edmonton with the Investors Group, gives the example of someone with a $40,000 portfolio: Leaving it untouched for 30 years at 7 per cent compound annual growth, it would be worth $304,000. But if half of the $40,000 is taken out, and repaid over 15 years, the value in 30 years would be about $233,000.
"I stress with my clients and with the general public: Consider the consequences, and there are many. Having said that, if people are forced to do it [an RRSP withdrawal]and have no other choice, there are ways to take money out."
While everyone's investments are different, the general rule of thumb is to do withdrawals without upsetting the portfolio's balance, although the best cash-in bets may be lower interest-bearing, less risky investments (such as GICs and money market funds), compared with equities such as stocks that have more earnings potential over the long term.
"You want to take a little bit out of everything to ensure your portfolio continues to maintain that mix you had before redemption," Mr. Nagy says. "A balanced portfolio that matches your tolerance mix, you want to maintain."
Mr. Clark likens the best strategy for withdrawing RRSPs to keeping a car safely on the road: "If you need to reduce the pressure in your tires by 20 pounds, you can take all 20 pounds out of one tire, or 10 out of one, 10 out of another, or probably the safest way - and this balanced approach is what applies to the [RRSP]portfolio, would be to take five pounds out of each tire, or to leave intact the portfolio mix appropriate for your goals. If you do it differently, your portfolio mix will be messed up."