Can I Borrow From My RRSP To Pay Off Debt?

Can I borrow from my RRSP to pay off debt? Deciding to withdraw from your RRSP to pay off debt is a choice that should be carefully considered. Let’s go over your options.
Bruce Hodges
November 19, 2023
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Can I Borrow From My RRSP To Pay Off Debt?

Are you feeling the weight of debt on your shoulders? It's not uncommon to consider all sources of funds when looking for a way to alleviate financial stress, including borrowing from your Registered Retirement Savings Plan (RRSP). But is this a wise move? In this article, we’ll review the basics of RRSP withdrawals, the implications, and how you should approach using this method to help pay off debt.

Key Takeaways:

  • It’s possible to use RRSP withdrawals to pay off debt, but it’s usually not the optimal financial decision due to the tax implications.

Understanding RRSP Withdrawals

RRSPs in Canada are designed to be long-term savings vehicles for retirement. With that said, the Canada Revenue Agency (CRA) does have provisions for withdrawing money from your RRSP before retirement, but it's crucial to understand the implications.

What Happens When You Withdraw from Your RRSP to Pay Off Debt?

Generally, when you withdraw money from your RRSP, you must pay income tax on the amount taken out, as it is considered income for that year. There are two main exceptions to this rule, which are part of the Home Buyers' Plan (HBP) and the Lifelong Learning Plan (LLP), allowing you to borrow money from your RRSP to buy your first home or to finance education, respectively.

However, these programs come with explicit rules and repayment plans. It's worth noting that neither of these options applies when you're looking to pay off debt. Thus, borrowing from your RRSP to tackle debt means you will be hit with a tax bill, potentially pushing you into a higher tax bracket for the year and negating some of the benefits of paying down your debt.

The Costs of Tapping Into Retirement Savings

Beyond the immediate tax implications, using RRSP funds to pay debt can have long-term consequences for your financial health. The money you withdraw loses the power of compound growth, which can significantly impact your retirement savings. 

Let’s go over the serious consequences of making this choice:

  • Withdrawals from RRSPs are considered taxable income, leading to immediate tax consequences in the year of withdrawal.
  • The financial institution withholding tax on RRSP withdrawals, which is a percentage based on the amount withdrawn, reduces the net amount received.
  • Withdrawing from RRSPs means losing the potential for tax-deferred growth on the invested funds, which can impact long-term retirement savings.
  • Reducing the balance of your RRSP can negatively affect your retirement income, as there may be less invested for the future.
  • Withdrawals from RRSPs do not regain contribution room. Once withdrawn, the contribution room is permanently lost.
  • Withdrawals may affect eligibility for income-tested benefits and credits, such as the Guaranteed Income Supplement (GIS) for seniors.

Alternative Options for Debt Relief 

Before you consider disrupting your retirement plans by borrowing from your RRSP, there is a compassionate alternative that could effectively help you manage and pay off your debt: Parachute. Our unique approach to debt consolidation offers several benefits over traditional methods or using retirement funds:

  • Cashback on Your Loan: Parachute believes in rewarding your financial progress. By taking actions that improve your financial wellness, you could receive up to 10% cashback on your consolidation loan.
  • Consolidation Without New Debt: We focus on consolidating your existing high-interest debt without opening a new credit line, avoiding further credit inquiries that could impact your credit score.
  • Long-term Financial Improvement: Our goal is to leave you better off than when you started. By the end of your loan term, you could enjoy improved cash flow, qualify for better interest rates, and boast a stronger credit score.
  • Real Savings: Our customers typically save an average of $300 per month by consolidating with our lower interest rates.
  • Flexible Terms: We offer loans from $5000 to $25,000 with interest rates from 24.99% to 29.99%, flexible payments, and terms ranging from 30 to 60 months.
  • Targeted Debt Consolidation: We specialize in helping you escape the grip of predatory high-interest debt, which often charges rates of 46% or higher.

Protecting Your Future

Deciding to withdraw from your RRSP to pay off debt is a choice that should be carefully considered. There are immediate and future costs to this decision, and often, there are alternative solutions available that can provide relief without compromising your retirement.

If you're grappling with high-interest debt and searching for a compassionate way to regain control of your finances, a debt consolidation loan from Parachute may be the lifeline you need. By consolidating your debts into one payment, lowering your interest rates, and setting you up with a practical repayment plan, you’ll be taking a definitive step towards financial well-being, keeping your retirement savings intact for the future you've been working towards.

Let's restore your financial freedom together. With Parachute, you're not just borrowing money; you're investing in a brighter financial future.

Bruce Hodges
Bruce, Founder and CEO of Parachute, worked for several of Canada’s top Banks, published research for the Canadian Bankers Association, and taught E-commerce Strategy in Wilfrid Laurier University’s MBA program. His first start-up built credit solutions for the likes of National Bank, Fair Isaac, and Ford Credit globally. Prior to starting Parachute, Bruce was COO of Foresters Financial, and EVP Transformation at CIBC, one of Canada’s top 5 banks. Bruce founded Parachute to disrupt the financial wellness space taking on payday, and high interest predatory lenders, with the intent to bring at risk Canadians back from the brink to good financial health.
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