Does it make sense to withdraw from an RRSP to pay off a mortgage?
I’m sorry to hear about your husband’s work, SK. The unemployment rate is still higher than pre-pandemic at 6.7% in October 2021, but much lower than the high of 13.7% in May 2020. If he received the Canada Recovery Benefit, that income support recently ended on October 23 2021. Hopefully he’ll find something soon.
When you have $ 50,000 in your Registered Retirement Plan (RRSP), you can make a withdrawal. You don’t have to wait to retire or reach a certain age. This assumes that it is not a locked-in RRSP that comes from a pension transfer. Locked accounts have restrictions. Regular personal RRSPs, however, are not.
The problem with an RRSP withdrawal is that the amount you withdraw is added to your income. If your existing income for the year is $ 50,000, you will pay at least 28% tax on your withdrawal, and possibly more, depending on how much you are making and what province or area you live in.
If your income is $ 100,000 and you withdraw the entire RRSP balance of $ 50,000, the rate can be as low as 35%, even 47%, and a national average of 41%.
The point is: You can only use half to two thirds of your withdrawal to repay the mortgage. RRSPs are generally intended to be paid in during high income years and withdrawn during low income years, ideally in retirement. If you need withdrawals during your business year, they can be very onerous.
If your husband has an RRSP account in his name, it might be better than withdrawing from your RRSP if his income is lower for the year.
To be clear, a lump sum on your mortgage, SK, will not reduce your monthly payments. This will reduce your mortgage balance and the number of payments remaining, but not your current monthly payment.
Other ways to pay the mortgage when money is tight
Alternatives may be considered in lieu of RRSP withdrawals. Home prices have skyrocketed in many parts of Canada, so you likely have equity in your home. You might consider using a line of credit to supplement your cash flow.