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  1. #1
    Expert Forum User The Ultimate London Mom!
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    Sep 2007
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    Default Using RRSP's to pay debt?

    We have a $50 000 line of credit that we want to pay down as soon as possible and will be tranferred to a term loan when I am back to work off of maternity leave. My husband thinks we should cash out some RRSP's since they aren't doing and get our loan down to 30 000. We have both been off work and it is a lower income year but I am still hesitant about cashing our RRSPs' whiel the market is low and we have "lost" some money on them as well. I appreciate any thoughts.

  2. #2
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    strongmommy's Avatar
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    Sep 2006
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    Hi there,

    This is a tough one because there really is no perfect answer.

    From a strictly math point of view it's not the best strategy (in fact it's generally going to cost you thousands in the long term) because you'll need to take out more than $20,000 to pay this amount on your line of credit (the RRSP company will withhold tax at the rate of:

    • 10% (5% in Quebec) on amounts up to $5,000;
    • 20% (10% in Quebec) on amounts over $5,000 up to including $15,000; and
    • 30% (15% in Quebec) on amounts over $15,000.
    In order to pay down $20,000 you'll have to withdraw about $28,600 (assuming you do it in one lump sum which you DON'T need to do --- in fact if you opt to take money out I'd suggest doing it over the next few months in $5000 increments to avoid prepaying the higher 30% tax). You also lose out on the growth over time which is where the thousands and thousands lost in future growth comes into play.

    Having said all that, you also need to sleep well at night so if you've exhausted all other options (talking to the bank about interest only payments on the line // taking off the insurance you're paying [which in my experience is usually WAY MORE - like hundred(s) more expensive each month than what you'd pay for term insurance on your life) then you should do what you need to do to feel in control. I would suggest that if you have other debt as well and you choose to withdraw RRSP's you use the cash to pay off the highest interest debt first with anything else left over put on the credit line.

    All the best on your decision.

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