I recently sat down with a middle aged couple who were debating the best strategy to pay off their debts. This couple are high income earners and have diligently contributed into their RRSPs over the years, so they have a sizable amount. They, however, also have quite a bit of debt they have accumulated and were at a crossroads as to how to tackle it. One party insisted on tackling the debt using the snowball method (which I will explain briefly in a moment), but the other party was adamant on taking out a huge chunk from their RRSPs and just paying the whole thing off. Unable to decide, they called my office seeking professional advice.

This scenario is one that I encounter quite frequently so I thought it would be helpful to provide you, our readers, with an insight into how RRSP withdrawals actually work, should you encounter it yourself. Look, I get it; you have these nagging debts following you around and weighing you down, and you’ve accrued a substantial amount of RRSP savings. So it would make sense to withdraw the funds and pay down your debt, right? Well…not so fast.

Many people don’t realize the hidden tax implications when it comes to RRSP withdrawals and my goal is to give you the facts needed to make an informed decision.

RRSPs are almost like a paycheque you receive from work. Every time you get paid from your job, I’m sure you’ve noticed that taxes are deducted before you get your money (who hasn’t noticed?!). The more you make, the more you’re taxed. RRSP withdrawals are treated as income (pretty much as though you’re working a second job and receiving a second paycheque) and are subject to withholding taxes – in other words, the more you withdraw, the more taxes are withheld, and by extension, the less money you actually walk away with.


Withdrawal Amount Withholding Tax (all Provinces except Quebec) Withholding Tax in Quebec

Up to $5,000






$5,001 – $15,000






Over $15,000






Okay, so let’s flesh this out with a real life example so you can really see how this looks. Suppose you live in Ontario and decide to withdraw $15,050 to pay off some credit card debt. This will carry a 30% withholding tax which equates to $4,515. This means you will receive only $10,535 out of that $15,050.

First, over $4,500 has just been “thrown away” – and you worked hard for that money. Second, this $10,535 will be added to your yearly income (remember, it’s like having a second job), meaning that this withdrawal could place you in a higher income tax bracket and have you pay more taxes. Without realizing it you’ve just paid close to 40% in taxes to pay off 18% or so in interest rates on your credit card. Is it worth it? Yes there is the emotional satisfaction of paying off the debt, but you’ve also filtered away quite a bit of money and set yourself back significantly. Finally, you’ve lost that RRSP contribution room. Are you jumping for joy yet?

Anyone who’s ever worked with me knows that I’m not a big fan of debt. You’ll find very rare circumstances where I would suggest taking on or holding on to debt (for a set period of time). Two of the most common methods that I recommend for tackling debt are the “Snowball” method, which is paying off debt starting with the lowest amount and working upwards; and the “Interest First” method, which is paying off debt starting with the one with the highest interest rate and working downwards. Each strategy has its merits but that is a topic for another day.

Ultimately using RRSPs to pay off debt is not beneficial in the long run. Now, there are some ways in which a pre-retirement RRSP withdrawal may make financial sense.


The Home Buyer’s Plan

Under this plan, you are allowed to withdraw (borrow) up to $25,000 (in Ontario) from your RRSP without any withholding tax, as long as the money is going towards the purchase of a home. You have 15 years to pay back the money to your RRSP – otherwise it will be treated as additional income, and subject to income taxes. To qualify for this plan, there must be a minimum of 5 years since you owned a home.


The Lifelong Learning Plan

The Lifelong Learning Plan is very similar to the home buyer’s plan. If you’re thinking of returning to school, this particular plan allows you to withdraw up to $20,000 (in Ontario) over a two year period. Again, you have to start paying this money back five years after the first withdrawal OR two years after the last withdrawal, to avoid any loss of contribution or tax implications. You have ten years to pay this money back.


So in summary, there is no short cut to getting out of debt and using your RRSPs is a short cut with huge tax consequences. Besides the two debt repayment options mentioned above briefly, there are a few other ways but each approach must be customized to your specific circumstance. If you’re not quite sure what to do, contact our office and let us help you to fully weigh your options.