I think that more importantly, than any of this, is to teach people WHEN THEY ARE YOUNG the struggles with credit cards, debt, repayments and investments.

The CC debt is psychological for me – I got bad deal on my divorce (lawyers, new place etc.) and need to get that out of my system.

How about two other options? Sell the assets but keep funds in the RRSP and use that to lend yourself your own money and pay your interest in to your own RRSP as a mortgage/LOC payment instead of a bank/financial institution.

EIther that, or sell the assets to get the money out, pay off your debt, re-borrow the money to buy income producing assets (like didvidend paying stocks). That way you’ll be near the same scenario but your interest paid on the borrowed funds is tax deductible.

Also, your first assumption states that you cash your entire RRSP in through one year, but that’s pretty bad tax planning.

I have a current RRSP balance of $119,326.08. Since inception (2005), it has made a return of 4.83%.

Now, I have a HELOC of $97162 at 4% currently. I own my home (700K converative). The HELOC balance is used to purchase my cottage. I also have another 250K on a 5yr fixed mortgage at 3.49%. I kept the HELOC open so I could pay it down with extra $ without penalty as I have stock options, bonus etc at work.

Now, if I assume the same return of 4.83% on the current balance of $119,326.08 for the next 10 years, that brings the balance to $191,245.50. This is a gain of $71,919.42. Now, say I’m in a 35% tax bracket when I cash thing out in 10 years when I have a little less hair. This means I am left with $124,309.58 in my pocket after paying the tax man as 35% tax is $66935.92. My “gain” is $4,983.50.

The scenario is – what happens if I cash it now? Am I better off in 10 years of worse?

OK, I am in the highest tax bracket of 46.41%. If I cash in $119,326.08, I have $63946.85 left to use in paying down my HELOC. This means that over 10 years, I pay $7139.29 in interest as opposed to $20,884.16. That is a difference of $13744.87. This is higher than the original gain of $4,983.50. Now, I am paying a bit more tax now as I cashing this in early when in a higher tax bracket, which is $11556.69 more.

I am still a couple thousand dollars up even by taking the tax hit now.

I realize that HELOC rates will go up and my RRSP return will go up and down. In my experience, this is crystal ball either way, so assume constant for now. Can I get a better return? Probably. Will interest rates rise? Yes. Will I be in a 35% tax bracket when I retire? Maybe. If all goes well, I’ll be in a higher bracket, then I’ll likely end up paying more tax anyway, which further says I should cash in debt now.

Would like to hear comments on this.

Yes You are right. Investment compnay is taken 31% of the 90K,
(27900) to pay taxes. I have taken 45K to pay debt and the remainder 19% was left invested (17100) to pay taxes in 2012 at my taxe bracket which is the highest.

It is hard, I just did my budget… OMG I was spending more than I was making per month…. lord gezuz!!! I am sooooooo cutting cost, its not even funny.

Thanks god my job is very stable.

thanks all for your feedback.

I lost a battle but I learned a valuable lesson. Show must go on!!

As Frugal Trader mentioned make sure you run the numbers through a tax calculator (like the one available on taxtips.ca ) and be absolutely sure you don’t rely on the withholding tax. If you take 90K out of an RRSP and it counts as income they will withhold 30% or 27K, but your tax bill would probably be closer to 35K-38K, depending on your income levels, so you don’t want to be surprised at tax time with a huge tax bill. Just a warning to make sure you are prepared :)

I have a 43000$ (multiple cards, all almost full to their limit) due to multiple bad issues in the last 2 years, right now I am barely making minimum payments, (once i n a while I missed payments) my credit record was A#1 and now is not the best.

I have over 90K in RRSP at this time I could use to pay my debt once for all, but it seems it is not a good idea.

As someone wrote in a previous post, banks used to call me at least once a week and they gave you as much rope so I can hang myself, this is my case now.

I just sent an email to my advisor to close the RRSP and I will pay off the debt and have a better sleep at night, not thinking I will miss a payment or the debt will become in a huge GOZILLA mosnter.

I plan to CUT ALL credit cards and keep only one, with a 2000$ limit and ensure that I change my spending habits. Pay CASH CASH CASH CASH CASH and MORE CASH!!!

I feel pretty shitty right now, defeated and a failure but those feelings will soon be over when I will be able to sleep better at night.

I will lose all those 90K room but at the same time, I have still about 50K in unsed room. Instead of making 1000$ month credit card payments will contribute at least 500$

any thoughts??

You can probably withdraw RRSP money tax-free and it’s probably best to get rid of the credit card debt.

The only way the withdrawal really works is if you plan to replenish the RRSP with money you would have instead spent paying for the credit card.

However, with no income and kids to feed, I don’t see how that really does anything but push back the crisis. If you don’t have any income, what’s the plan to rebuild the savings?

If you’re using the credit card to make the bills and you can’t go back to work, then it’s time to have a serious chat with your spouse / partner / family / money earner & figure out how to balance the budget.

Have you contributed anything to the spousal RRSP in the last 3 years? If so, then withdrawals could be taxed back to your husband. If not, then you get about $11,000 in tax credits each year (probably more in your case), so you will probably pay zero tax on the RRSP.

If the credit card debt is at 19% or something like that, it is unlikely that you would make that much from your investments.

The issue, though, is that most Canadians have far too little saved for their future and their retirement. Cashing in your future to pay off current spending is often questionable. I would suggest an option would be to cash in the RRSP to pay off the credit cards, but then take the amount you have been paying on the credit cards and contribute that monthly to your spousal RRSP to start building it for your future.

Ed

I have about 12K on my LOC, but ever since I bought my house, I can’t seem to get it to go down in spite of making hundreds of dollars in payments each month. Because I’ve incurred this debt (foolish me!), and I’m socking money into it hand over fist, I haven’t been able to save much cash for short term goals/needs as defined above. So here’s the problem – every time there’s an unexpected cost (and there ALWAYS seems to be something!), I have no LIQUID savings to dip into to cover it, so I use my line of credit, which seems to have become nothing but a revolving door … put money in, take money out, put money in, take money out… all the while paying interest.

(note, I do have a decent pension at work, and a about 30K saved in a variety of less than liquid financial vehicles (GICs, stocks, RRSPs etc.) plus my house (minus mortgage!)).

So here’s my thought – I’m going to go on a financial “diet” for the rest of the calendar year and put as much cash into the LOC as possible (hoping to pay off about half), and in January, cash out an RRSP to cover the remainder. If I cash out in January 2011, I have the rest of the year to make contributions back into the RRSP to limit the impact on my 2011 income and taxes. Also, will only take out 5K or less to keep the withholding tax to its minimum 10%.

My hope is that once the debt is paid off, the money that I’m currently using to cover monthly LOC payments can then be split between short term (liquid) and long term (not-so-liquid) savings. I know I’m losing the future income on the RRSP, but paying a few hundred dollars a month into a LOC that seems to be going no-where, with no indication that this pattern will change, I’d rather kill the debt, and take those monthly payments and use them to 1) invest and 2) build a small savings for unexpected costs and short term goals that will allow me to stay away from the LOC as much as possible. Maybe it’s psychological as suggested, but that stupid debt is keeping me from investing and enjoying life (feel guilty taking a vacation when have 12K cloud looming over head…)

When the card interest charges exceed the money to be made in the RRSP in the short term, this seems to be a no brainer. However, I have regretted the decision to do so ever since. I have gone into detail below to help others looking at this option.

I had approximately 9K in credit card debt(@ an average rate of 14.9% over 3 cards) and approx 10K in RRSP savings- As my RRSP’s were not performing well and I was unable to add any money into them for 2 successive years due to financial constraints- I also was limited in the amount I could pay off my credit.for the same reason. I liquidated my RRSP and paid off the credit card, but, I did not have anything to replace the earning power of my RRSP (even 3% earnings were better than nothing) and it has been 5 years since I have been able to start putting money into an RRSP again. I put 10 K in last year and have been making 11% since I invested that, but, I could have made that return amount over the last 3 years with the funds I liquidated. So, Lesson 1: If your RRSP is underperforming now, that doesn’t mean it will keep doing so. Don’t get sucked in by moment-to-moment logic when it comes to your RRSP-they should always be examined in terms of the long-term plan.

Additionally, at the time I liquidated the RRSP, I owned my own home. I sold it shortly afterward due to divorce. I did not have any capital left over after the sale. Last year, when things were getting better, I tried to buy my second home but found that, since I had no significant savings (because: why pay off credit cards using RRSP unless you don’t have any other savings?) I qualified for significantly less and at a worse mortgage rate than my first home when I had 25K available in my RRSP (I used 15K as a first-time homebuyers advancement from my RRSP-still paying that back). It also has affected my car loan rate from my bank. My credit is immaculate over the last 15 years. Lesson 2: Savings are beneficial to you on more levels than just the simple math.

The tax withheld at source by my bank was 10% on all the funds I withdrew. With no way to redict the tax rate I will face when I retire and begin withdrawing funds, I choose, now, to add the 10% to the cost of using my RRSP’s to pay for my unsecured debt- to make the adjustment, I simply add the witholding percentage to the growth rate of the funds in my RRSP to calculate if this is a good idea for you.
Lesson 3: If it seems like a no-brainer, it probably isn’t when it comes to money management and the balance between debt and savings.

Lastly, I paid off the credit cards but still was living the lifestyle that led to the debt. I learned to change the spending habits that caused me the debt in the first place, but, it did not happen overnight and I incurred more credit card debt before I did. My spending habits were not that bad to begin with(no a drinker/partier, no drugs, no gambling, eating out 2-3 times a month- BEFORE I paid off the cards), but, I still needed to make some changes. I am reaping the benefits of the changes now, but I would have been better to make them before I paid off the debt. Lesson 4: Make changes to spending habits first but LIVE them for at least 4 months so they become part of your lifestyle before you take the $$ from your RRSP so you don’t jump back into the debit snowball making machine.

A credit card is almost a must to build a credit rating and perform many transactions. I have kept only one card active and, despite being offered a five figure credit limit, I have told the bank to shave the limit down to 3K. This amount is enough to get me on a plane in case of a family medical emergency and/or will pay for a household emergency repair of a plumbing/electrical problem. It is also sufficient to pre-pay for a vacation package reservation but is not so big that I can get myself into trouble. Lesson 5: The banks LOVE to give you enough rope to hang yourself with but are, generally, reluctant to help you out of the hole because they don’t make money on you that way.. They will allow you to accrue big debt so they can continue to make money on the interest they charge. Be firm that you want a low limit card and NEVER have more than one.

I didn’t take my own advice, and my RRSPs are now worth 1/2 their original value before 2001. Bah.