It seems many Canadians aren't very good at using RRSPs. In fact, a significant and growing minority are using their retirement plans like savings accounts, taking money out when needed — and suffering a major tax penalty in the process.
And with Canadian household debt growing larger by the minute, the situation appears to be worsening.
A survey from the Bank of Montreal has found consumers are raiding their RRSPs in ever larger amounts to cover debt and living expenses, a move the experts say should only ever be a last resort.
According to the survey, carried out for the bank by Pollara, 40 per cent of respondents at some point took money out of their RRSP. As recently as two years ago, only 34 per cent of Canadians had done so.
And the amount they're withdrawing is on the rise, up nearly 22 per cent in a year, to $20,952 on average.
Watch: Should you invest in an RRSP or a TFSA?
"We've seen a steady increase in the amount of money Canadians are withdrawing from their RRSPs to meet short-term needs," said Robert Armstrong, vice-president of multi asset solutions at BMO Global Asset Management.
"This should be considered only as a last resort."
There are two "legitimate" reasons for withdrawing money from RRSPs: to purchase a first home under the Home Buyers Plan, or to further your education under the Life Long Learning Plan. In both instances, RRSP withdrawals are not taxed so long as the money is eventually repaid.
And while buying a home is the most common reason for withdrawing from an RRSP, cited by 27 per cent of respondents, plenty of Canadians are taking out RRSP money to cover living expenses (23 per cent), for emergencies (21 per cent) and to pay off debts (20 per cent).
In those instances, money withdrawn from RRSPs is heavily taxed. The government charges a "withholding tax" on withdrawals that financial institutions automatically hold back. Outside Quebec, that tax is 10 per cent on amounts of $5,000 or less, 20 per cent for amounts between $5,000 and $15,000 and 30 per cent on amounts greater than $15,000. (In Quebec, it's 5 per cent, 10 per cent and 15 per cent, respectively, plus provincial taxes.)
So someone who withdraws $20,000 from their RRSP to cover their debts or living expenses would end up with just $14,000, and could still be on the hook for income taxes on that amount at tax time.
Those tax rates are meant to be punishing; they are meant to dissuade people from withdrawing from their retirement funds by eliminating the tax benefit you get from putting money in an RRSP in the first place.
What to do instead of raiding your RRSP
If you're taking money out of your RRSP to cover a short-term or unexpected expense, consider taking out a line of credit instead. Financial experts note that lines of credit have considerably lower interest rates than credit cards.
If you're taking money out of your RRSP to cover debt, the experts say you should look at all other options first, including debt consolidation. You may be able to bundle all your debts into a single monthly payment, over five years. The interest rate on these is higher than on car loans or mortgages, but lower than on credit cards, and you also save money by avoiding late and missed payment penalties on your debts.
You may also be able to consolidate all your debts into your mortgage, a move that may make sense if you are carrying a lot of high-interest debt. But the experts note that adding those debts to your mortgage extends the repayment of those debts over the life of the mortgage — which means you could end up paying quite a bit of interest on that money in the long run.
Those who find themselves raiding their RRSP may simply be putting money into the wrong savings vehicle. In that case, consider a tax-free savings account (TFSA) which doesn't give you as large a refund at tax time, but does protect your savings from capital gains taxes. And you can withdraw without penalty, so long as you don't withdraw the same year you put the money in.
Less money going into RRSPs
BMO's study also found that 47 per cent of Canadians plan to make an RRSP contribution this year, roughly the same as last year at 46 per cent. But the amount contributed is shrinking, down to $4,616 this year, compared to $5,088 last year.
The survey also found 36 per cent of Canadians are not planning to contribute to an RRSP this year, and 17 per cent remained undecided.
Of those who said they wouldn't contribute, 40 per cent said it was due to lack of cash; 23 per cent said they had more pressing expenses; and eight per cent said they have other investments they plan to make.
BMO's survey was carried out online between Dec. 21 and Dec. 28, 2017, using a sample of 1,500 adult Canadians. The margin of error is estimated at +/- 2.5 percentage points, 19 times out of 20.
Also on HuffPost: