RRSP WITHDRAWAL BY THEN UMBERS

Wealth adviser Gary Gorr answers some hypothetical numbers: What if I withdrew money from my RRSP to get rid of a $20,000 debt?

If you withdraw up to $5,000, the government withholds 10 per cent of it. From $5,001 to $15,000, it’s 20 per cent and then 30 per cent for anything greater than $15,000.

So let’s assume that you’re paying a minimum of three per cent to carry your $20,000 of debt or $600 a month.

The debt has an interest rate of 18 per cent.

To pay off your debt, you must withdraw $25,000 from your RRSP (the withholding rate is 20 per cent). Now, you’ve freed up $600 every month now that the debt is eliminated. But what would the $20,000 be worth at age 65 at a six per cent yield if it had not been withdrawn?

If you were 35 when you did this, that $25,000 in the RRSP would be worth $143,587 when you were 65.

Ouch. OK, what if I withdraw the money, pay off the debt, and invest the $600 a month every month to age 65?

If you indeed did do this, your deposits would be worth $569,219, provided you have the discipline to save the $600 a month, Gorr says. Well, what if I could budget and reduce spending and find an extra $300 per month on top of the minimum $600 to get rid of the debt? In 27 months, you would be debt free, your RRSP would be intact and now you can save even more toward your future, he says.