Dale Jackson

Personal Finance Columnist, Payback Time

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A new study from BMO Financial Group finds Canadians are taking more money out of their registered retirement savings plans before retirement - $17,213 on average last year compared with $15,908 the year before.

It says 30 per cent of respondents used it to fund a home purchase, 21 per cent put the cash toward living expenses and 18 per cent used it to pay down debt.

Whether that’s a good thing or a bad thing depends on your situation. If you make an early withdrawal for living expenses or paying down debt it will be taxed as income and how much tax you pay depends on which tax bracket you fall in. If you have lost your job or your income is curtailed, withdrawing from your RRSP might make sense from a tax perspective (assuming you have a choice).

In any case, it’s important to know that early withdrawals from an RRSP are subject to a withholding tax. That means the CRA will take a certain amount off the top and you could get some back, or pay more, when you file your income tax (depending on your income bracket).

Home Buyer’s Plan:

The 30 per cent of respondents who withdrew from their RRSPs likely did it under the Homebuyer’s Plan. First time home buyers can borrow up to $25,000 tax free from their RRSPs to put toward the home. Those who choose this option are given a 15-year period to pay the money back to their RRSPs. Once 15 years have elapsed, however, you will be taxed and the opportunity to replace the borrowed money is permanently lost.

Borrowing from your RRSP to buy a home could provide a bigger down payment - providing more equity in the home, and perhaps avoiding mandatory mortgage insurance.

Lifelong Learning Plan:

There are no immediate tax consequences if you borrow from your RRSP to go back to school. The maximum amount you're allowed to withdraw under the Lifelong Learning Plan is $20,000, and only $10,000 can be withdrawn each year. Repayments start 2 years after the last withdrawal or five years after the first withdrawal – whichever is first. Once your repayment begins, you will have 10 years to pay the money back to your RRSP before the opportunity to replace these funds is lost entirely.