Q&A: Paying off debt
Question: If one has a significant amount of consumer debt, would it be advisable to withdraw money from an RRSP to pay off that debt? – Rae and Gary B.
Gordon Pape answers: By “consumer debt” I assume you mean credit card debt, most of which carries interest rates that border on usury. For example, the annualized rate on most Visas and MasterCards is almost 20 per cent. With interest rates that high, I understand the temptation to dip into an RRSP to pay off the balance.
The problem is that it will likely cost even more to do that. Withdrawals from an RRSP are taxed at your marginal rate which, unless your income is very low, will be well in excess of 20 per cent. This means you have to pay the government as well as the credit card company. If your tax bracket is in the 30 per cent range, you would need to withdraw about $14,300 from an RRSP to have enough left after tax to discharge a $10,000 loan. That’s a very expensive way to handle it.