Drowning in debt

Question: I have savings in RRSPs but I also have debt, which is preventing me from getting ahead. Can I withdraw funds from my RRSP account to pay down some of this debt and then begin once again with saving in RRSPs? – (signed) Drowning in Moncton


You can withdraw money from an RRSP at any time, assuming two conditions are met:

1) The plan is not locked in. If it is, provincial regulations may still allow you to take some money out in extreme circumstances, but the rules vary across the country.

2) The assets you want to withdraw are not locked in. For example, if your money is in a five-year non-redeemable GIC, you would have to negotiate with the financial institution that issued it to see if they will let you out early and with what penalty.

You also need to consider the cost of taking money out of the RRSP. The withdrawal will be taxed at your marginal rate. If you redeem units in a mutual fund that you purchased on a back-end load basis, there may be deferred sales charges. If you close the plan entirely, there may be a termination fee.

This is not to say that you shouldn’t do it. But before you act, assess all the cts involved and see if it is worthwhile. Also see if there are other options. For example, if you are making regular contributions to the plan you might want to suspend them and direct the money to reducing your debt. Another possibility is to consolidate all your debts into a single, lower-interest loan. Check with your bank.

If you decide to withdraw everything from the RRSP, you can open a new plan later, once the debt is paid off. However, you will save termination costs and a lot of paperwork by keeping the plan open, even if it only holds a small amount of money. – G.P.