Many Canadians poaching their nest egg

While Canadians are increasingly taking advantage of the tax-deferred growth offered through RRSPs, they may be contributing more to their plans than they can really afford, according to surveys from two of the country’s financial institutions.

A study by Scotiabank found that nearly one-quarter of Canadians have tapped their retirement savings for one reason or another. While funding a home purchase was the top reason, with 8% taking advantage of the Homebuyers Plan, more disturbing is that 6% said they had made withdrawals from their RRSP to pay for “day-to-day living expenses.”

“Meeting day-to-day commitments should not be at the expense of future gains. Canadians need to find a balance between meeting everyday financial needs and long-term planning,” said Howard Kabot, national director of financial planning, Scotiabank. “Taking money out of an RRSP should always be a last resort as the funds will eventually be taxed at the investor’s highest marginal rate.”

Kabot says using credit is a smarter option, especially in the form of a line of credit, which generally carries a lower interest rate than credit cards. For some, this may prove problematic, as paying down debt was the third most common reason cited for making an RRSP withdrawal, at 4% of respondents.

Only 1% of respondents said they had taken cash out under the Lifelong Learning Plan, which is similar to the Home Buyers Plan in that the amount must be repaid to the RRSP within 15 years. Failing to do so results in an interest penalty as well as taxation on the amount withdrawn. Still, of those who took advantage of these two programs, one in five said they did not plan to repay the amount.

“Even if you take money out of your RRSP that you are not eligible to repay, individuals should try to make it up by maximizing their RRSP contributions in the future,” said Kabot. “Doing this will help maintain the value of retirement savings in the long-run.”

The survey also found that baby boomers were less likely to raid their nest egg than people outside of their demographic. Only 19% of respondents between the ages of 39 and 58 said they had taken out cash, compared to 27% of those either older or younger.

That sounds logical, since people older than boomers could be taking the cash out to fund their retirement, but the survey found only 3% of the non-boomer group had converted their RRSP to a RRIF.