Inform clients about the do’s and don’ts around RRSPs if they’re planning to make a contribution or an early withdrawal, says Jamie Golombek, managing director, Tax & Estate Planning, CIBC Wealth Advisory Services.
“It’s tempting to tap your RRSPs for an emergency, but RRSPs should generally be viewed as long-term savings tools,” says Golombek. “Borrowing money from your RRSP can make sense if you use the funds prudently to fund longer-term goals that deliver their own return, such as buying a home, which hopefully increases your net worth, or investing in your education, which may help boost your earnings potential.”
The TFSA may be a better option if clients need more flexibility with their finances, he says.
Under the Home Buyers’ Plan (HBP), a client can withdraw up to $25,000 from the RRSP to purchase a new home. Her spouse or partner may also be able to withdraw $25,000, for a combined total of $50,000. To take advantage of the HBP, the client needs to be a first-time home buyer, which is generally defined as someone who hasn’t owned a home in the past five years.
“This is a smart option for first-time home-buyers who are just pulling together their funds,” says Golombek. Amounts withdrawn under the HBP, however, must be repaid over a maximum of 15 years or the amount not repaid in a year is added to the client’s income and becomes taxable.
Back to school
Through the Lifelong Learning Plan (LLP), a client can borrow $10,000 a year, up to a total of $20,000, from his RRSP to finance his education. To take advantage of this plan, he must be enrolled or must have received an offer to enroll on a full-time basis in a qualifying Canadian or foreign educational institution. The funds can then be used for any purpose with no proof of expenses required, and must be repaid over a 10-year period. The LLP cannot be used to fund his child’s education.
With both the HBP and LLP, there are no penalties for paying back the funds earlier than required.
While an RRSP can help fund long-term financial goals, it should generally not be viewed as a go-to emergency fund, Golombek says.
RRSP withdrawals are taxable at the client’s marginal tax rate and are subject to immediate withholding taxes when withdrawn.
“If you dip into your RRSP for extra cash, you will not only be taxed, but you will lose the ability to recontribute those funds to your RRSP without generating additional room,” says Golombek.
If you think clients may have to draw on long-term savings before retirement, a TFSA may be the better option because it offers more flexibility.