Almost 35% of Canadians have withdrawn money from their RRSP before retirement, according to a new BMO study.
On average, Canadians have withdrawn $15,908 from their RRSPs and while one third have paid back the money, 25% expect they will never pay it back.
"Making an RRSP withdrawal to free up funds should only be considered as a last resort. To meet unexpected future needs, consider building up a contingency fund in a short-term savings vehicle such as a TFSA or savings account instead of dipping into your RRSP," said Chris Buttigieg, Senior Manager, Wealth Planning Strategy, BMO Wealth Management. "It's best to only make premature RRSP withdrawals for the purpose of buying a new home or paying for continuing education, as these withdrawals may qualify for the Home Buyers Plan or the Life Long Learning Plan, respectively."
The top reasons for making RRSP withdrawals, include:
- To buy a home (25%)
- To pay off debt (21%)
- To help pay living expenses (21%)
- To cover costs after an emergency, such as a car accident or house flood (15%)
"Although it's not advisable to make withdrawals from an RRSP, it's clear that some Canadians have had to do so in order to meet short-term needs," said Buttigieg. "There are tax consequences associated with making early withdrawals from your RRSPs, so it's a good idea to speak with a financial professional to see if you have any other options before doing so."
The study also found that, of those Canadians who have made an RRSP withdrawal, the majority (84%) said they only did so as a last resort. Three quarters said they were very concerned about the potential consequences of this decision, including:
- Loss of retirement income (79%)
- Withholding tax on the cash at the time of withdrawal (77%)
- Not being able to save effectively for retirement (77%)
- Loss of contribution room in the future (62%)
"If you've withdrawn from your RRSP early, a financial professional can help you assess the impact on your retirement savings and get your plans for your golden years back on track," said Buttigieg.