Personal Finance

Stay at Home Parent + RRSP Withdrawal

  • Last Updated:
  • May 18th, 2018 5:30 pm
[OP]
Sr. Member
Nov 10, 2012
781 posts
282 upvotes
Calgary

Stay at Home Parent + RRSP Withdrawal

Here is my situation:

My wife is a stay at home parent with our young kids. Before she stopped working a few years ago, she had accumulated some savings in an RRSP. We are thinking about buying an investment property and I was wondering if there is any downside to withdrawing some of her RRSP money to use for the investment.

Note she has no other income right now. Just want to assess the pros and (mainly) cons of doing this. Thanks.
13 replies
Deal Addict
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Jul 22, 2008
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Toronto
Pro: since your wife has no other income right now, withdrawing from the RRSP will trigger zero or very low taxes depending on the amount.

Con: once you withdraw, the contribution room is effectively lost, so you are permanently reducing the amount of money your wife can invest tax-sheltered in an RRSP. You could mitigate this by using the Home Buyers' Plan and repaying the money back into your wife's RRSP within 15 years.
Deal Addict
Jul 15, 2009
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Note that the taxes on the withdrawal will never be zero. Her increase in income will reduce your spousal credit and thus increase your taxes by about 20% of the amount withdrawn (15% federal plus around 5% provincial).
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Jul 22, 2008
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bubak wrote:
May 17th, 2018 8:30 pm
Note that the taxes on the withdrawal will never be zero. Her increase in income will reduce your spousal credit and thus increase your taxes by about 20% of the amount withdrawn (15% federal plus around 5% provincial).
Thanks for pointing this out. I didn't even know this tax credit existed.
Deal Fanatic
Nov 24, 2013
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Kingston, ON
Increasing household income (via the RRSP withdrawals) will also reduce your Canada Child Benefit payments for the following year. The exact rate depends on the number of children you have and whether your household income is $30K-$65K or $65K+.

In light of CCB, it’s probably more efficient to not withdraw until the kids are going to turn 18, but if you need the funds now for an investment property, it is what it is.
Deal Fanatic
Feb 1, 2006
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Listen to the two posters above who know what they're talking about, some serious tax repercussions possible if you do this.
Deal Addict
Feb 21, 2004
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Montreal
An alternate option is to move your RRSP investments to a financial company that allows you to borrow against your investments (as collateral). The only one I know of is Manuvie (that'll be Manulife for the ROC) but I'm sure there are plenty others
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May 8, 2009
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HoTiCE_ wrote:
May 18th, 2018 8:41 am
An alternate option is to move your RRSP investments to a financial company that allows you to borrow against your investments (as collateral). The only one I know of is Manuvie (that'll be Manulife for the ROC) but I'm sure there are plenty others
I would downvote this suggestion. RRSP loans are a bad idea IMO when there are cool balance transfer promo's off credit cards with MBNA and the likes.
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Feb 21, 2004
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titaniumtux wrote:
May 18th, 2018 10:35 am
I would downvote this suggestion. RRSP loans are a bad idea IMO when there are cool balance transfer promo's off credit cards with MBNA and the likes.
How is that a viable alternate suggestion? OP has funds tied in RRSP and wondering if he should withdraw to invest. You lose that contribution room forever! I dont see how MBNA balance transfer can help in this situation?
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HoTiCE_ wrote:
May 18th, 2018 12:18 pm
How is that a viable alternate suggestion? OP has funds tied in RRSP and wondering if he should withdraw to invest. You lose that contribution room forever! I dont see how MBNA balance transfer can help in this situation?
In case one needs a loan, much more competitive rates than an RRSP loan.
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Feb 1, 2006
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HoTiCE_ wrote:
May 18th, 2018 8:41 am
An alternate option is to move your RRSP investments to a financial company that allows you to borrow against your investments (as collateral). The only one I know of is Manuvie (that'll be Manulife for the ROC) but I'm sure there are plenty others
There are rules against using your RRSP as collateral for loans, how does Manulife get around this? Can't find anything online about it.
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Bullseye wrote:
May 18th, 2018 1:16 pm
There are rules against using your RRSP as collateral for loans, how does Manulife get around this? Can't find anything online about it.
Big banks offer RRSP loans, but we RFDers know those aren't competitive borrowing outlets.
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Deal Addict
Feb 21, 2004
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@titaniumtux I think you mis-understood OP and myself. We're not looking at loans to invest in a RRSP. We're talking about having your RRSPs at Manulife and having them loan additional amount of cash for other investments

@bullseye I can't find anything either. I was contacted by a planner last year and she told me that if I transferred my RRSPs there, I could borrow a certain amount of money to invest elsewhere. Whether this was actually collateralized by the RRSP or not is another discussion but I never pursued it anyways.

The closest thing I found might be what they call Multiplier Loans here
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http://laws-lois.justice.gc.ca/eng/acts ... .html#h-78
Property used as security for loan
(10)
If at any time in a taxation year a trust governed by a registered retirement savings plan uses or permits to be used any property of the trust as security for a loan, the fair market value of the property at the time it commenced to be so used shall be included in computing the income for the year of the taxpayer who is the annuitant under the plan at that time.
Recovery of property used as security
(7)
Where in a taxation year a loan, for which a trust governed by a registered retirement savings plan has used or permitted to be used trust property as security, ceases to be extant, and the fair market value of the property so used was included by virtue of subsection 146(10) in computing the income of the taxpayer who is the annuitant under the plan, there may be deducted, in computing the income of the taxpayer for the taxation year, an amount equal to the amount, if any, remaining when

(a) the net loss (exclusive of payments by the trust as or on account of interest) sustained by the trust in consequence of its using the property, or permitting it to be used, as security for the loan and not as a result of a change in the fair market value of the property

is deducted from

(b) the amount so included in computing the income of the taxpayer in consequence of the trust’s using the property, or permitting it to be used, as security for the loan.
In other words, you can use RRSP assets as collateral... the loan amount is added to your income when you take out the loan, but after the loan is paid off you can deduct it again minus losses. All without actually moving anything in or out of the RRSP and not affecting your contribution room. This can definitely be beneficial when taking time off work, considering the higher taxes paid in the year off will probably be less than the benefit of re-deducting when the wife is working again.
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