What You Need to Know About RRSPs & Consumer Proposals

When you’re struggling to handle your debts, putting money aside for an eventuality doesn’t feel as urgent as paying off the bills you are getting constant reminders to pay. Saving money and getting out of debt are two financial goals that can seem like they’re at opposite ends of a money spectrum, but they don’t have to be.

Planning for your future is essential. The good news is that, even if you’re swimming in debt, you can make your financial goals of saving for retirement a reality by establishing a registered Retirement Savings Plan (RRSP).

What you may not know is, when you are in a registered consumer proposal, your creditors will not claim your RRSP savings. You have full reign to use your RRSP to your benefit. You can maintain your savings, put them towards paying off your debt, or save and rebuild your credit to obtain a loan when you have completed your debt relief program.

When you work with the licensed trustees at David Sklar & Associates, we will assess your financials and help you weigh your consumer proposal and RRSP options so that you can choose the best possible option for you.

What Is An RRSP?

A registered retirement savings plan (RRSP) is a valuable type of investment account designed for Canadians to save for their retirement. Compared to a regular investment account, RRSPs offer two significant tax benefits: tax-deferred growth and tax credits.

The fact that RRSPs are tax-deferred means that any profits you make from capital gains or interest do not qualify as taxable income. The second major benefit from this type of savings account is the tax credit; the amount you contribute reduces your taxable income (to a certain degree).

These accounts are registered with the federal government, are legally recognized as a trust, offer the aforementioned tax benefits, and hold many different types of investments. For many people, the tax benefits of RRSPs are a major motivation to contribute. 

For those struggling with debt, having a healthy RRSP could be one of your long-term financial goals. When you work with us for your debt relief needs, we can help you establish and execute plans to achieve these goals.

What Happens to My RRSP If I File A Consumer Proposal?

If you have an RRSP and are looking at filing a consumer proposal as the best solution for handling your debt, you may wonder what assets you can keep and what has to go in the agreement. The good news is that filing a consumer proposal does not mean you have to lose your RRSP. In fact, you typically don’t need to give up any of your assets at all.

However, if you were to file bankruptcy, you would lose any RRSP contributions made in the last year (12 months). The exception is that if your RRSP was with a life insurance company and you have a preferred beneficiary, you would be able to keep these contributions.

Consider the advantages of a consumer proposal as you weigh your options for debt relief. Debt relief is possible, so let a trained bankruptcy trustee guide you through it.

How To Rebuild Your Credit & Get An RRSP Loan

It’s challenging to get an RRSP loan when you are partaking in a debt relief program like a consumer proposal. It’s best to complete your consumer proposal and use the time to build your credit so that you can get an RRSP loan after the fact.

Getting RRSP Loans

When you are still in a registered consumer proposal, getting credit, even one such as an RRSP loan, can be difficult due to your credit history and the fact that your credit rating has been tarnished. Lenders will likely want to wait a bit of time after you have completed your consumer proposal and have been discharged before they consider providing you credit.  That said, after a discharge from a consumer proposal, the probability of getting approved for a RRSP loan can rise.

Keep Your Spending Under Control

Fight the urge to overspend, and work towards having an emergency savings fund. Chances are, there will be a time when an unexpected bill will arise, and having some extra money set aside can help alleviate that financial strain.

Know The Difference Between Needs & Wants

The “want” areas tend to be the problem of spending. Prioritize paying any loans and bills on time and in full payments. When possible, pay off your debts early. The sooner you pay off your debts, the sooner you can start saving more for your future — including putting more into your RRSPs. With any loans that you do take out, make sure they are within your comfort zone regarding the amount you can handle. As always, keep a close check on your credit history periodically.

The Reality Of Saving

The old saying goes: a penny saved is a penny earned, but how easy is it really to save money while juggling debts, costs of living, dependents, and your bills? In 2018, an annual survey done by the Canadian Payroll Association suggested that 44 percent (compared to 2017’s 47%) of working Canadians would find it challenging to meet their financial obligations if their pay was delayed by a single week. 

Withdrawing RRSP To Pay Debt

Many individuals in a registered consumer proposal are looking for an RRSP loan to set them up financially for the future. On the other hand, individuals in consumer proposals who already have substantial RRSP savings may consider using RRSP to pay off debts.

Using RRSP to pay off debt can look different for various individuals. For one, you can withdraw your RRSP to pay your debt completely. Alternatively, you may prefer borrowing from RRSP to pay your debt to use the funds alongside other cash sources.

Before withdrawing RRSP to pay a debt, you need to make sure it’s worth it. When you cash out your RRSP early, two things will happen:

  • You will get some deductions to your RRSP due to early pay-out
  • You will have to pay tax on the added income

How to Withdraw RRSP to Pay Debt

To withdraw your RRSP, you have to submit a request to your advisor. Your advisor will fill out a form, have you sign it, and inform you of any additional taxes you will have to pay on the amount.

At David Sklar & Associates, we have ample experience helping our clients with consumer proposals and RRSPs.

Get Out Of Debt With David Sklar & Associates

Savings are difficult to accumulate when you’re struggling to get by and meet all of your financial obligations. The first step in getting out of debt and working towards a financially stable future might be taking a serious look at your finances and taking action.

Partner up with a licensed insolvency trustee at David Sklar & Associates who can help you weigh your options. With a trustee, you can learn about the benefits of bankruptcy vs a consumer proposal and figure what works best for your situation as it pertains to your assets, creditors, and long-term financial goals.

Contact us to book your free consultation and learn more about your options.

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