Retirement saving is a lifelong marathon, so it's not surprising that some people are tempted to take a break partway through. But what if that break tacked on more miles at the end?
As diligent as many Canadians are at saving for retirement, others raid their registered retirement savings plans well before they pass the finish line. A Bank of Nova Scotia poll published this year found that four of every 10 Canadians draw down their RRSPs long before their careers come to a close.
Some do it for good reason – 16 per cent, for example, took advantage of the first-time home buyer tax credit – but others dipped in to cover vacations and day-to-day expenses.
People are entitled to use their savings as they see fit – after all, they worked hard for that money. But they need to realize that doing so can push the retirement finish line further away. If they are tempted, it might be time for a checkup with a financial adviser, experts say.
"It's a vehicle that we save in for a future goal," says Chris Buttigieg, a senior manager of wealth planning strategy with Bank of Montreal. "But, of course, life happens."
RRSPs are designed for strategic timing – to build tax-sheltered wealth over time to draw down later, in retirement, when you are likely in a lower tax bracket. Hence the marathon metaphor: Slow, steady persistence wins the race, while interruptions can hurt your end goals.
The account is meant to complement, rather than replace, other savings efforts. But not everyone has the luxury or foresight to save for every possible contingency. After putting money aside for retirement, home ownership and education, cash flow can get squeezed.
"There's only so much money that's available," Mr. Buttigieg says. "So when something does come up – they need to put up a new roof, a new appliance needs to be purchased, a new vehicle – sometimes, unfortunately, the RRSP is the account that gets dipped into."
Individuals face immediate consequences to such a move – they should expect a T4 statement in the mail next tax season, for instance. But the longer-term consequences also hurt: You lose out on the long-term, tax-deferred growth that would have come from that money.
So people should be aware of the other options available, Mr. Buttigieg says. "If they do need the funds in an emergency, they should consider holding them in a tax-free savings account. What's really needed is an education on the different vehicles there are for savings in Canada."
Savers have three good reasons for dipping into their RRSPs, says Ahmad Dajani, Bank of Nova Scotia's vice-president of retail deposits. They are the purpose-built first-time home buyer credit, the similar lifelong learning plan for education and training, and for strategically spreading out taxable income in low-earning years.
The last one is an option for people who might take time away from work, perhaps to look after children, temporarily thrusting them into a lower tax bracket.
"It may make sense – 'may' is the key word – to look at the opportunity to withdraw from their RRSP today rather than waiting for when they're back into a higher income bracket," Mr. Dajani says.
John Natale, an assistant vice-president with Manulife Financial Corp. focused on retirement and estate planning, points out that you never get your contribution room back with early RRSP withdrawals, compared with TFSAs, where they can be regained in the following years.
Like many financial experts, he warns against early withdrawals. "I'm not saying that in 100 per cent of scenarios it's always a bad idea," he says, but "in the majority of situations, it is a bad idea."
But still, emergencies happen. Which is why it's a good idea, when faced with the prospect of raiding an RRSP, to check in with an expert.
"The emergencies that come up in life are natural and normal for all of us," Mr. Dajani says. "The important part is how we ensure these types of emergencies don't cause a dent in helping us achieve our retirement goals."