A Registered Retirement Savings Plan (RRSP) is one of the most popular ways Canadians save for their retirement. In 2012, Canadians contributed a total of $35.7 billion to RRSPs.
Despite these funds being earmarked for retirement, a large number of Canadians continue to borrow from their RRSP for things other than their golden years. According to Statistics Canada, 1.82 million Canadians made an early withdrawal from their RRSP in 2012 (the most recent data available).
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These early withdrawals could end up costing you, in the form of penalty taxes, but what do you do if you are in a financial emergency and need cash fast? Keep reading for tips on making early withdrawals from your RRSP and alternatives when you need cash fast.
RRSP basics
An RRSP is an account registered with the Canadian government that offers certain tax benefits over other investment accounts.
Unlike a regular investment account, the contributions you make to your RRSP will not be taxed by the government until the funds are withdrawn down the road. Investments are able to grow and compound tax free. Because most people will be earning a lower income in their retirement, the taxes they pay on the funds withdrawn from an RRSP tend to be lower than during the peak earning years. Contributing to an RRSP also provides Canadians with tax credits on their annual income tax returns.
The tax benefits offered by RRSPs are the government’s way of encouraging Canadians to save for their retirement. RRSPs are a win for both future retirees and the feds – having lots of Canadians retire with healthy RRSPs lessens the burden on the government to provide for those in retirement.
“Government pensions are not enough to retire on,” said Bruce Barran, CPA, CA, a partner with Davis Martindale LLP. “You need to plan ahead for retirement and RRSPs are a good retirement savings vehicle.”
The government wants you to use your RRSP for retirement, not vacations and shopping sprees. To this end, provisions are in place that make it costly to make early withdrawals from your RRSP.
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