Most people spend quite a bit of time thinking about their financial situation. The amount of debt we carry can place a large burden on a family’s shoulders, whether it is a mortgage, vehicle loan, line of credit, other personal loans or credit card debt.
A question that is asked often is whether or not investments should be redeemed to pay down debt, even Registered Retirement Savings Plans (RRSPs). Every situation is unique, but here are some factors that should be considered.
Withdrawals from an RRSP account are added to your income for the year and is taxed at your marginal tax rate. Institutions typically withhold tax from your registered withdrawal – 10% for the first 5K, 20% from 5001 to 15K and 30% for any withdrawals over 15K. More tax may be due when you file your tax return for the year, or, you can possibly get a refund if your situation warrants.
Withdrawals from a registered plan such as a Tax Free Savings Account (TFSA) have no withholding tax, but you lose tax free growth in your investment. Before withdrawing from investments look into lower interest options by consolidating debt to a mortgage or line of credit or a lower interest rate credit card. If these are not options, and your debt is causing your monthly cash flow to be very tight and is causing a stressful situation, it could be beneficial to withdraw from investments to pay down debt.
Talk to your advisor for information to help you make the right decision for your future.