For years, the government and the big banks have been encouraging Canadians to set aside as much money as possible in their RRSPs each year. This has created a strange situation – people may be having debt problems and at the same time they have savings for retirement that they can’t easily access. To complicate things further, the government made RRSPs exempt from seizure, even in a bankruptcy.
Here are some specific things you need to know:
- The only money that can be seized from a RRSP if you file for bankruptcy are funds that have been deposited within the last 12 months. In other words, any money you deposit into an RRSP in the year immediately before you file for bankruptcy may be withdrawn as part of your bankruptcy and given to your creditors;
- RRSP funds that have some form of life insurance (or annuity) component are 100% exempt from seizure if the beneficiary of the plan is one of the following people: grandparents, parents, spouse, children, grand children. If your RRSP is administered by a life insurance company then point 1 does not apply – all of the money in your RRSP is exempt.
- Points 1 and 2 are designed to provide some level of protection for money honestly set aside for retirement – if you make large deposits or changes to your RRSP just before you file for bankruptcy (as a form of planning to protect your assets from your creditors) the Court may place conditions on your discharge from bankruptcy. The court is unlikely to order you to cash out your RRSPs, but they may order you to pay an amount equal to whatever the Court thinks you were trying to protect.
All of this leads to an emerging issue in the insolvency industry – the growing number of Canadians experiencing high levels of debt in retirement. Many wonder if they should withdraw their RRSP to repay their debts.
The purpose of saving money in your RRSPs is to provide a reasonable standard of living in your retirement and reduce your dependence on government pensions. Using your RRSPs before your retire as a debt solution negates any future benefit to having the RRSPs in the first place. Similarly, if you have converted your RRSPs into a RIFF or other form of annuity, the purpose of this money was to allow you live, not to service your debts.
If you are experiencing debt problems we strongly suggest you speak to a trustee before you make any changes to your RRSPs. There are numerous debt solutions available to deal with your debt problems – it is better to consider all of your options before you impact your retirement savings.