Money Should I raid my RRSP to pay off my line of credit?

18:08  08 may  2018
18:08  08 may  2018 Source:   moneysense.ca

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Should I raid my RRSP to pay off my line of credit ?

pension plan , so they really should max out their RRSP contributions annually. Last week a stay-at-home mom asked about taking out a home equity line of credit to contribute to her RRSP . Often they intend to downsize their home to pay off the loan if it is still lurking around by retirement .

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Q. My wife and I currently have a mortgage of $297,000. On top of that we’ve had to dip into our line of credit (unsecured) to the tune of $44,000. I’m trying to determine whether or not it makes sense to withdraw the $44,000 – plus the withholding tax – from my RRSP.

I currently participate in a DB pension and am in a fairly safe/steady employment position. My RRSP is currently sitting at $150,000 and my salary is approximately $115,000.

Re-financing is going to cost quite a bit and wouldn’t necessarily cover the full debt load.

—Tom

A. I don’t want to be one of those judgemental financial experts who tells you that if you have had to dip into your line of credit to the tune of $44,000, you’re spending too much money. Life happens and sometimes there are expenses that go beyond our budget. Obviously if you guys are continuing to run up your line of credit balance though, that’s not sustainable forever, Tom. But you know that.

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The debt is a line of credit that she is paying 4% on. She’s a widow and has 3,000 in RRSPs . In order to pay off the ,000 in four years, she would need to pay ,400 annually in principal and interest. If withdrawn from her RRSP , she would need to take out at least ,700 to cover this.

Use retirement to pay off debt: Should I cash in RRSP to repay Line of Credit ? 8. Pay off debt with RRSPs , or refinance and roll into Mortgage? -4. Do I need to repay back my line of credit in the form of monthly payments ? 1.

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With regards to your RRSP withdrawal plan, I think it’s important to clarify that the withholding tax is not the final tax on your withdrawal. An RRSP withdrawal is fully taxable income and gets added to your other income for the year when determining tax payable on your tax return. Tax already withheld gets credited, but you will owe more tax over and above.

You have an income of $115,000 and you’re in a pension plan, so I’ll estimate your taxable income at $105,000 after pension and other deductions, Tom. If you want to have $44,000 after tax from your RRSP withdrawal, you will probably need to take a withdrawal of about $80,000 from your RRSP. It could be more or less depending on the province you live in. In Ontario, it would be about $81,000. In Quebec, about $86,000. And in Saskatchewan, only about $76,000.

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The rate of return on paying off your line of credit is 6%. I don't know the rate of return you are getting on your RRSP or TFSA investments, but it is probably not 6%. Your financial advisor should know, anyway.

Pay off debt with RRSPs , or refinance and roll into Mortgage? 4. Can I draw funds from a personal line of credit to pay its own monthly “minimum payment ”? Is it possible to use an RRSP mortgage to pay off a line of credit ? 6. Should I cash out some of my retirement to pay credit card debt? 8.

In the same way claiming a tax deduction from an RRSP contribution can be great when you have a high income, taking withdrawals when you have a high income can be terribly taxing. So, Tom, you may need to take out nearly twice as much from your RRSP as you need to be left with what you want after-tax.

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I suspect your line of credit interest rate could be 6-8% if it is an unsecured line of credit. You may not be able to generate an 8% RRSP return over the long-run, but 4-5% in a balanced portfolio or 6-7% in an aggressive one may not be unrealistic. If you were contemplating a TFSA withdrawal, with no tax payable, I’d be all for swapping investments for debt repayment. But let’s do some quick math on the assumption that you’re an Ontario resident contemplating an RRSP withdrawal.

You’d need to take a withdrawal of $81,000 from your RRSP to have $44,000 after-tax. Let’s say you are giving up a 4% return on your $81,000 in investments – that’s $3,240 per year. Let’s say your $44,000 line of credit is at 8% interest – that’s $3,520 per year. Not much difference, right? But you’d have to give up $37,000 of RRSP capital in the form of tax to wipe out the line of credit.

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Mike Grenby and his wife bought their first house in Vancouver in 1971. They worked hard and sacrificed (their son didn’t make it to Disneyland until he was 21) — and they paid off their mortgage in seven years.

Travis October 21, 2008, 4:54 pm. Hi, I want to know if I should withdraw some of my RRSP Savings to pay off my CC. I have maxed line of credit , credit cards and with drawn about 000 in RRSPs to pay legal fees.

I think I would be much more inclined in your case to continue to plug away at debt repayment, Tom. If you could consolidate your line of credit into your mortgage, that would be ideal as you could bring your interest rate down. If it means you don’t pay your debt off for longer or even into retirement, you may be better off in the long run by not raiding your RRSP in a high-income, high-tax year.

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Given you have a DB pension, you may have a fairly high income in retirement as well, but likely nowhere near what your income is now. Plus, in the meantime, you will have a bigger RRSP growing more and more over time that you can strategically withdraw in retirement.

Cashing in investments to pay down debt is well worth considering if those investments are non-registered or TFSA investments. But when it comes to RRSP withdrawals, I think you need to have a low income to make it a viable solution, Tom. You should contribute to RRSPs in high income years, not withdraw, unless there is an incredibly extraordinary situation. A bit of unsecured line of credit debt isn’t extraordinary in my opinion.

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Use retirement to pay off debt: Should I cash in RRSP to repay Line of Credit ? Points paid on purchase of principal residence - tax deductible? 6. Cash out retirement account or sell and downsize the house to pay off line of credit ?

If you’re using a line of credit when you get a new job, you’ve racked up 00 worth of additional debt, that you now have to pay off , plus interest. I figure the repayment is manageable provided I budget for it monthly instead of putting it off until the end of RRSP season.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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