Some individuals might consider cashing out their investments, such as RRSPs, in order to reduce their debts and manage their financial obligations more effectively.Even though cashing in your RRSP may seem like a good idea, there are several reasons why this is not the best method for repaying your debts:Using your RRSP for debt repayment has been tax-sheltered. If you withdraw pension money from your RRSP to pay off debt, your retirement funds will be added to your income this year, and you may find that you are liable for more taxes than you anticipated. You have created a new tax debt by using the money to solve one problem and then filing your income tax return.When money is drawn from an RRSP for reasons other than retirement or the purchase of a first home, there is a withholding tax on the amount, and you will not receive the full amount. Thus, you are less likely to be able to pay your debts because you have less money to pay your debts, and you have lost a part of your savings to the government.You will have to begin saving for retirement all over again with less time and money if you reinvest your retirement savings in debt repayment.

So What Can I do instead of Using My RRSP?

Consult an accounting firm for professional advice. Talk to a licensed tax and accounting firm about your situation, review your options, and determine the most appropriate plan for you.Bankruptcies do not affect RRSPs. In a consumer proposal, your retirement savings are not affected. You get to keep your investments after you file a consumer proposal or personal bankruptcy. In addition, eliminating your debts through bankruptcy or a consumer proposal can help regenerate your credit score. It will also provide you with future financial opportunities that you will not have if you use your RRSP funds solely for paying off a portion of your debt. You will learn healthy financial habits as part of these debt relief solutions so that once you are debt-free, you will remain debt-free.It is important to think long-term when considering debt relief options. In spite of the fact that capping an RRSP may seem like a quick solution for debt reduction, it will only lead to bigger problems once you're forced to rely on those savings for retirement.Please get in touch with us today for a free consultation if you consider withdrawing money from your RRSP to pay off debt. We are happy to discuss the options available for protecting your retirement.

Invest in RRSP or pay down debt

There are several factors to consider:

  • The amount of debt you owe; and
  • the type of debt you owe.

Liquidating assets to pay down debt

The question appears to be relatively straightforward at first glance. A person who owes money and owns valuable assets should convert these assets into cash that you can use to repay the debt.Sell your old car if you no longer require it and use the proceeds to pay off your credit card debt. It is an obvious decision.RRSPs, however, are very different, and they differ for one simple reason:You do not have to pay income tax on the sale of your car if you bought it for $5,000 four years ago and sold it for $3,000 today because you did not earn any income on that sale. Since you technically lost money in this example, you can keep the entire $3,000 and are not required to pay taxes.

Final Thoughts

If your debts are not large, you are not earning much in your RRSP anyway, and you can pay the tax, then, by all means, cash out your RRSP to pay off your debts.If your debts are substantial, and if even cashing in your RRSP is not sufficient to resolve the issue, you should seek the assistance of licensed accounts and tax professionals. We can crunch the numbers and determine whether it makes more sense to cash in your RRSP to pay off your debts or whether you ought to consider other options.