In Ontario, you’re protected by the Ontario Collection and Debt Settlement Services Act (the “Act”). The Act sets out strict laws on what a debt collection agency can - and cannot - do. Among other things, it attempts to curb collection agencies from using harassing or intimidating tactics to get you to repay the debt you owe. Here's what this law covers.
Are you drowning in bills? Are you sick of ignoring phone calls from collections? Are you feeling weighed down by the burden of your debt? If so, you might be questioning whether or not you should do an RRSP withdrawal in a last ditch effort to pay off your debts.
If you find yourself in this position and you are contemplating asset liquidation, it’s time to contact a Licensed Insolvency Trustee (LIT). A LIT can explain the different debt management options that are available to you and can help you develop a plan of action. A LIT can help you to make an informed choice instead of you rushing out making irreversible decisions that will affect your financial situation for years to come.
Should I Withdraw My RRSPs to Pay Off Debt?
If you are struggling to pay your debts, withdrawing your RRSPS to pay the bills might seem like the right thing to do. Before you go and cash in your retirement savings there are a few things you should take into account.
How Much Debt Do You Have?
If you have only a small amount of debt and a large amount of money in your RRSPs, then withdrawing a portion of your RRSPs can be a useful debt management strategy. However, if you have a ton of debt and your RRSPs won’t cover the full amount, then cashing in your retirement savings might not be the answer. This is true for a few reasons.
RRSP Withdrawal Has Tax Implications
First, if you withdraw your RRSPs before retirement, you will have to pay a withholding tax. This can be expensive. In Ontario, there is a 10% tax rate on withdrawals up to $5,000, a 20% rate on withdrawals over $5,000 and up to $15,000, and a 30% rate if you withdraw more than $15,000. Also, remember that once you withdraw from your RRSPs, you don’t get the contribution room back.
RRSPs Are Protected in Bankruptcy
Second, if you find yourself considering Bankruptcy or a Consumer Proposal in Canada it’s important to know that most RRSPs are exempt. This means your creditors can’t come after this money (with some exceptions which we will discuss below).
However, once you withdraw the money from your RRSPs it becomes cash and is no longer protected from seizure in Bankruptcy.
So, if you are in mountains of debt and you are desperate to dig yourself out, don’t do an RRSP withdrawal. It’s better to keep this money protected so at least you will have something put aside for your future.
Are All RRSPs Exempt From Bankruptcy?
No, not all RRSPs are exempt from Bankruptcy. There is an exception. According to the Bankruptcy and Insolvency Act, RRSP contributions that were made within 12 months of the date of Bankruptcy are not exempt from seizure. The reason for this exception is so that people don’t try to hide their assets before declaring Bankruptcy.
Are All Registered Savings Plans (RSPs) Exempt From Bankruptcy?
When it comes to other registered savings accounts like the Registered Retirement Income Fund (RRIF), and the Registered Disability Savings Plan (RDSP), the same rules apply. This money is safe from seizure in Bankruptcy, providing it was contributed 12 months prior to the date of Bankruptcy. The same is true for spousal RRSPs.
However, other registered savings plans (RSPs) do not follow the same rules.
RSP vs. RRSP
The terms RSP and RRSP are often used interchangeably, but they are different. An RSP is a registered savings plan and it can be used to save for retirement, among other things. An RRSP is a type of RSP that is used for retirement savings.
Other examples of RSPs include the Tax-Free Savings Account (TFSA) and Registered Education Savings Plan (RESP). Unlike the RRSP, these RSPs do not follow the same rules when it comes to an exemption from seizure in Bankruptcy. The RSP contributions in a TFSA or RESP are subject to seizure if you file for Bankruptcy.
The rules for registered savings plans can vary between the provinces so if you find yourself confused you can reach out to a LIT. A LIT can provide clarity, peace of mind, and advice before you make any debt management decisions.
Will my Government Retirement Income be Affected by Bankruptcy?
If you receive government income in the form of the Canada Pension Plan (CPP) or Old Age Security (OAS), this income will not be affected if you file for Bankruptcy.
Is my Pension Plan Exempt from Bankruptcy?
If you have a Locked-in Retirement Account (LIRA), then it is exempt from seizure. A LIRA is a type of registered pension fund that can only be used for retirement income.
Why Are RRSPs Exempt From Bankruptcy?
As of 2008, the federal government passed a law allowing all RRSPs (except for those made within 12-months) to be exempt from seizure in Bankruptcy. The reason this rule came into effect was to try and correct an imbalance between Canadians paying with a company or government-sponsored pension plan (which is exempt from creditors) and those Canadians that didn’t have a pension. Canadians that don’t have an employee pension and use RRSPs to save for retirement are now on a more even playing field when it comes to how their retirement savings are dealt with in the case of Bankruptcy or a Consumer Proposal.
Reach Out to a Licensed Insolvency Trustee For Help
Before you make any major financial decisions, like withdrawing your RRSPs to pay off debt, reach out to a LIT. A LIT is a federally regulated professional who can provide you with advice for your debt problems.
A LIT can work with you so you can make informed choices to deal with your debt and financial difficulties. Instead of rushing out and making irreversible decisions that will affect your financial situation for years to come, give yourself permission to get help. You don’t need to do this alone, we are here to assist you. Reach out to Adamson and Associates for a free consultation by calling 519-310-JOHN (5646).