Jan. 9, 2026 "Keep your hands off that RRSP, your future self will thank you": Today I found this article by Dale Jackson on BNN Bloomberg:
Early data from Visa Canada suggests a 4.4 per cent increase in spending this holiday season over last year.
Estimates from other spending monitors point to averages between $943 and $2,000, depending on whether travel is included.
As those bills roll in many will turn to their registered retirement savings plans (RRSP) for relief.
A recent BMO survey found 38 per cent of Canadians dip into their RRSPs early for one reason or another.
If holiday debt has you eyeing your RRSP savings it’s important to know
that early withdrawals could have staggering tax consequences,
and there might be better ways to raise cash.
Tax consequences for RRSP withdrawals
If you are currently working full time,
an RRSP withdrawal is probably the worst idea from a tax perspective.
They are designed to allow contributions to grow tax-free in the investments of your choice until they are withdrawn in retirement
- ideally at a lower marginal tax rate.
In addition to tax free growth, plan holders can benefit by contributing in years when their income is taxed at a higher marginal rate.
If your highest marginal rate is 40 per cent, for example,
you avoid paying a 40 per cent tax on your contribution the year it is made.
If it is withdrawn at a 20 per cent marginal rate in retirement,
you get big tax savings.
Early withdrawals not only deny the ability for that money to grow in investments over the years,
but they will be taxed at a higher rate if your income is the same as it was when the contribution was made.
That’s because the amount that is withdrawn
is added to that year’s income.
In other words, a contribution that resulted in a 40 per cent tax savings
could be taxed at over 40 per cent.
It gets worse.
Any RRSP withdrawal made by a plan holder under 65 years old
is subject to an immediate withholding tax as high as 30 per cent.
The maximum withholding tax applies to withdrawals over $15,000.
It’s smaller for lower amounts and residents of Quebec.
If an early RRSP withdrawal pushes your marginal tax rate over thirty per cent,
you will owe more than the 30 per cent withholding tax
when tax time comes around in the spring.
One more thing; once you make an early RRSP withdrawal,
you lose that allowable contribution room if you are looking for a tax shelter in future, higher income, years.
When it makes sense to withdraw from an RRSP early
If you suffer a loss of income
and your marginal tax rate is lower as a result,
you must still pay the withholding tax on early RRSP withdrawals.
However, the final tax bill will be much lower
because it will be taxed according to that year’s income
regardless of your age.
It just might be the lifeline you need to pay off your holiday debt.
You can also avoid any tax if the funds are used to
purchase a first home
or go back to school (provided the funds are returned within a certain period of time).
Tax-free cash from a TFSA
A tax free savings account (TFSA) withdrawal is probably a better idea if you want quick cash to pay down debt.
They are designed for short term savings.
TFSA contributions can not be deducted from your income like RRSPs but
withdrawals, and any returns they generate are never taxed.
There are contribution limits, so be sure to keep track.
Like an RRSP,
you can hold a wide range of investments in a TFSA
but if you expect to make early withdrawals a
void investments that require longer term commitments.
Borrowing to pay down high-interest debt
If you choose to postpone your credit card debt and pay the minimum amount required,
interest on the balance can be as high as 30 per cent.
Even borrowing from consumer lines of credit can generate double-digit interest rates.
Borrowing to pay holiday bills can be extremely costly
and lead to a lifetime of regret.
If you own a home, however,
one short-term solution could involve paying down high interest debt
with a low interest home equity line of credit (HELOC).
HELOCs normally have the lowest rates
because they are secured against the equity in your home.
HELOC interest rates are normally tied to the bank’s prime lending rate; currently 4.5 per cent.
A typical home equity rate is prime plus one per cent but still adds up as the balance compounds over time.
There are online debt calculators available that can help put the true cost of borrowing in perspective.
Jan. 30, 2026 "Clock is ticking on RRSP deadline. Here’s what you need to know": Today I found this article by Dale Jackson on BNN Bloomberg:
It’s that time of year again; RRSP season.
Canadians have until March 2 to put down their snow shovels
and make a contribution to their registered retirement savings plans (RRSP)
if they want to lower their 2025 income tax bill.
According to the latest tally from Statistics Canada, tax filers contribute an estimated $55 billion to their RRSPs annually with a median contribution at roughly $4,000.
RRSPs have been the favorite tax-saving investment vehicle for average Canadians for nearly 70 years;
allowing investments to grow tax-free over time, to a day when the tax sting is less.
RRSP basics
RRSP accounts can be set up through just about any financial institution.
Contributions can be deducted from taxable income in any calendar year going forward.
Whether you meet this year’s deadline or not,
your contribution can be deducted from 2026 income or future income.
Those contributions can be invested in just about anything;
stocks,
bonds,
mutual funds,
exchange traded funds (ETFs),
some options - whatever.
You can even keep them in cash.
The investments can compound
and grow tax-free
for decades
until they are withdrawn.
At that point they are fully taxed - ideally at a low marginal tax rate in retirement.
The RRSP contribution limit this year is 18 per cent of reported earned income in 2024 to a maximum of $33,810.
Unused space can be carried forward to future years.
The Canada Revenue Agency (CRA) keeps track and
lists remaining contribution space on each year’s tax statement for individuals.
Getting the biggest bang for your RRSP buck
Canadians love their RRSPs because contributions made before the deadline almost always result in a lower tax bill in the spring.
In cases where an employer makes payroll deductions throughout the year it usually results in a refund.
The size of the refund depends on the contribution amount
and how much taxable income you generate the year it is claimed,
which determines your marginal tax rate.
Here’s a simplified example:
If you live in Ontario and earn less than $55,000,
your combined federal and provincial tax rate is about 15 per cent.
That means an RRSP contribution of $10,000 would lower your tax bill by 15 per cent,
or $1,500.
If you live in Ontario and earn over $250,000, your combined tax rate could top 50 per cent.
A $10,000 RRSP contribution at that marginal rate would generate a 50 per cent tax reduction
or $5,000.
If it seems like RRSPs favour the rich, you’re right.
Tax savings for lower income Canadians are much smaller
than those with higher incomes.
One strategy that could help level the playing field is
to make contributions when you can,
but only claim them in high income years.
RRSP drawbacks
That means if you contribute to your RRSP at the lowest marginal rate,
the best you can hope for is to withdraw savings at the lowest marginal tax rate in retirement.
In that case, the only real advantage to an RRSP is tax-free growth over time.
If you contribute a lot
and invest well,
and your RRSP savings grow above expectations,
that’s a good thing but it could put you at a higher marginal rate
than your original contribution
when it comes time to make withdrawals.
When you reach 71 years, Ottawa will impose minimum RRSP withdrawals,
which could also result in Old Age Security (OAS) claw backs if they reach a certain threshold.
If you make an early withdrawal while you are still working,
the amount you remove from the plan will be taxed
at whatever rate you are paying that year.
If you are already taxed at a high marginal rate,
the amount you withdraw could push you into an even higher tax bracket.
Early withdrawals could make sense if your income has been serious reduced
but you will lose that allowable contribution space forever.
Ottawa also allows tax free withdrawals for
continuing education
or to buy a first home,
as long as the money is returned to your RRSP within a certain period of time.
My opinion: This part stood out to me the most:
Here’s a simplified example:
If you live in Ontario and earn less than $55,000,
your combined federal and provincial tax rate is about 15 per cent.
That means an RRSP contribution of $10,000 would lower your tax bill by 15 per cent,
or $1,500.
If you live in Ontario and earn over $250,000, your combined tax rate could top 50 per cent.
A $10,000 RRSP contribution at that marginal rate would generate a 50 per cent tax reduction
or $5,000.
If it seems like RRSPs favour the rich, you’re right.
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