Saving for retirement is something we’re told to start doing the moment we enter the workforce. After all, the more time you have to save up for the Golden Years, the more money you’ll be able to put away without having to scramble at the last minute.
And one particular vehicle that’s specifically designed to help us save for retirement are RRSPs.
A Registered Retirement Savings Plan (RRSP) can be used as a way to save up for retirement while helping you reduce your taxes owed and without being subject to being taxed. That’s one of the biggest benefits to RRSPs, as your contributions to this account are sheltered from taxes.
But aside from saving up for retirement, can RRSPs be used for any other purposes? After all, that’s a large sum of money that will continue to grow, and life is always full of hefty expenses that need to be covered from time to time.
There are other applications of RRSPs besides setting up a nice little financial nest egg for yourself once you quit the workforce. In fact, many Canadians borrow from their RRSP for things other than saving for retirement.
According to a recent BMO survey, about 40 per cent of Canadians withdrew their money from their RRSPs in 2017 either to pay off debt, spend on various expenses, or simply because they didn’t have enough money. More specifically, Canadians have withdrawn an average of $20,952 from their RRSPs, an increase of $3,739 from the previous year.
However, depending on how you withdraw the funds and what you use them for, you could be taxed on the money at your annual income tax rate. Let’s dig a little deeper into what RRSPs are and some good uses for them aside from saving for retirement.
What Are RRSPs?
An RRSP is a savings plan that is set up with the federal government and is contributed to by yourself or your spouse/common-law partner. As already mentioned, your RRSP contributions can reduce the amount of taxes you pay every year. Even the interest/income you earn from your RRSP is exempt from taxes, as long as you don’t withdraw them early.
By the time you reach the end of the calendar year when you turn 71 years old, RRSP contributions will no longer be made. At this point, your RRSP funds can then be used as retirement income by transferring the funds into a Registered Retirement Income Fund (RRIF), which is where your retirement funds will be accessed.
What Happens if You Withdraw Funds Early?
If you don’t wait until you’re 71 to start tapping into your RRSPs, the money you take will be immediately taxed. The tax rate is 10 per cent for withdrawals up to $5,000, 20 per cent for withdrawals between $5,001 and $15,000, and 30 per cent for withdrawals over $15,000.
As long as your RRSP fund contributions aren’t locked in, you can essentially withdraw from your RRSPs whenever you want, as long as you’re prepared to pay the tax consequences. In this case, there are all sorts of things that you can use your RRSP funds for, including the following:
- Home renovations
- Car repairs
- Children’s post-secondary education
- Family vacation
- Medical bills
Like loaned funds, RRSP money can be used for a variety of expenditures, though you’ll be subjecting yourself to taxation and will be losing out on tax-sheltered compounding of any earnings and the contribution room you initially used to deposit your funds into your RRSP account.
That said, there are certain programs put in place that allow you to use the funds from your RRSPs without being subject to penalty: the Home Buyer’s Plan and Lifelong Learning Plan.
Down Payment For a Home
Perhaps one of the more common reasons why Canadians dip into their RRSP accounts early is to buy their first home. The prices of homes these days is sky-high. In Toronto, the average home price currently sits at $761,800.
The minimum down payment amount of 5 per cent to secure a mortgage for a house at this price point would translate to $38.090. That’s a lot of money for consumers to gather up, especially young buyers who have only recently started working and have no previous home to sell and use towards the purchase of a property.
To help first-time buyers, the Home Buyer’s Plan (HBP) is available, which allows money to be withdrawn from RRSPs to be used as a down payment for a first home.
With this plan, you’re allowed to borrow up to $25,000 from your RRSPs if you’re a first-time homebuyer. Rather than saving up for a down payment in a traditional savings account, you can save up that money and put it into your RRSP while realizing tax savings and potential tax refunds every year.
Not only would you have the money to be used as a downpayment, but you’d also have a few extra bucks from tax savings.
The one caveat is that the money borrowed must be repaid in 15 years. If you miss any payments, you’ll have to pay taxes on that amount missed.
In addition to helping you borrow for a down payment for a home purchase, the money from your RRSP account can also be used to cover the cost of education or training for work for either yourself or your spouse. Under the Lifelong Learning Plan, you can withdraw funds from your RRSP tax-free.
In order to take advantage of this plan, you’ll need to fill out Canada Revenue Form RC96 for every withdrawal made. You’re then allowed to withdraw as much as $20,000 from your RRSPs in total, but no more than $10,000 a year.
Like the HBP, the Lifelong Learning Plan requires that the funds be repaid within a specific amount of time. For this particular plan, you’ll have no more than 10 years to repay the money borrowed from your RRSPs. Again, any missed payments will be taxed at the appropriate rate.
RRSP funds were meant to stay put until you retire. This type of account was not meant to provide a savings account that you can dip into whenever the need arises. While you can withdraw from this account early, you’ll lose the benefits of tax sheltering.
That said, you may be able to use the money to be used for a downpayment for a home or for continuing education for yourself or your spouse without suffering any taxation consequences. Be sure to speak with a tax specialist who will be able to guide you on the uses of your RRSP contributions before you hit retirement age.