Why Your RRSP is Not an Emergency Fund
Using your RRSP in a pinch? There are costs to dipping into it early. A TFSA is much better-suited for that purpose. Your RRSP is not an emergency fund.
Of course, many Canadians don’t even have an emergency fund to deal with unexpected contingencies. They rely on debt (usually credit card debt) to cover ongoing expenses. And if you’re borrowing to invest in an RRSP, that will probably just compound the debt problem rather than get you the return you want. Some believe they can can just dip into their retirement savings any old time. We’ll explain below why that’s not such a good idea.
Here’s the rundown on the reasons why your RRSP is not an emergency fund.
You’ll have to pay partial de-registration fees
You’ve probably never heard of these. That’s because most people won’t until they get charged. Still, most institutions charge you to withdraw from an RRSP. It’s usually about $50, but on a $1000 withdrawal, for instance, that’s 5%. Pretty steep.
Your contribution room is gone forever
Once you take money out of your RRSP that contribution room is gone for good. You can’t re-contribute it back next year like you can with the TFSA.
You’ll pay a withholding tax and income tax
You will be charged a withholding tax of anywhere from 10%-30% (half that in Quebec). So, bear that in mind; you’ll need to withdraw enough to cover your emergency expenses and the tax. Since RRSP withdrawals are considered income in the year you withdraw them, depending on your current income you may also owe further tax at the end of the year. Be sure to prepare for these additional tax costs.
Some tips for building a better emergency fund
The RRSP beats the TFSA when it comes to long-term investing for retirement. However, as we mentioned at the start, a TFSA is a much better vehicle for building emergency fund savings. Additionally, you can easily set up automatic contributions every month, to help you save regularly. That way, when your car needs new brakes or your utility bills go up (or something else rains on your parade), you’re instantly ready for it.
Think about how your emergency funds fit into your overall financial picture. A good emergency fund should be easy and convenient to access for those kinds of real emergency needs (It’s not a slush fund for topping up a holiday gift-buying spree).
Ideally, it should not have any impact on your long-term retirement plans. Do check out our fuller discussion about how much to put into a rainy day fund and whether it’s absolutely necessary for you.
One last tip: it’s a good idea to check if you have appropriate insurance such as disability and critical illness (Paying a deductible is usually preferable to paying the full cost of those kinds of contingencies).
Taking these steps will help ensure your retirement savings are secure to grow, even when times get tough. If you need help, feel free to talk to your financial adviser. Every CI Direct Investing client gets unlimited financial advice.