Life happens and it can foul up your RRSP for you

Mr. X just collapsed an RRSP for nearly $50,000. I explained the deep tax consequences he would experience, suggested alternatives, but still he insisted, so we got him his money. Why was he drawing this cash from his RRSP?

His wife had gotten a better job offer to improve her career, and this involved relocating. Since his RRSP was a spousal RRSP the last three years of her contributions were taxed back at her higher tax rate when they withdrew that money. Also the extra income in his name will bump him up into a higher tax rate. The good news is they had about $35,000 left to use for their relocation moving expenses.

On the broader picture why do so many people raid their RRSPs before retirement?

Some take advantage of the Homebuyer Plan or the LifeLong Learning Plan; these have been introduced in recent years. Excluding these two programs how much money comes out?

StatsCan reports that nearly 39% of RRSPs are raided and about half of these people make several withdrawals before retirement. Many times these withdrawals bump people into higher tax brackets so they actually pay more in taxes than the tax deduction they got in the first place.

This is only one reason why I suggest that people who are not over age 35 and don't have over $35,000 saved outside an RRSP shouldn't start an RRSP program. Another reason is that careers frequently lead to higher incomes in later years so wouldn't it be smarter to tax advantage of the higher taxes associated with those incomes involved with career advancement?

Using up RRSP room in early years may not be so smart. Invest outside the RRSP first. Always check with a financial planner, but remember many financial advisers do buy into the large company advertising which is geared to making money for their shareholders and is not always a good deal for the client.