Posts Tagged ‘RRSP’

Reader Question:Do I Have To Share My RRSP With My Spouse When I Get Divorced?

Posted: October 31, 2012 in Divorce, RRSP
Tags: , , , , , , , , , , , ,
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Another reader of the Canadian Budget Binder blog asked the question, “Do I have to Share my RRSP with my Spouse When I get Divorced”?

In Ontario there is the Family Law Act. In simple terms all property acquired after the date of marriage, up until the time of marriage breakdown is deemed to be the property of both parties. The ownership of the property is not a factor. So in short each person is entitled to 50% of the total family property.

There are certain exceptions like the family home that was brought into the relationship or received as a gift or inheritance. However to keep things simple we will ignore this.

RRSP’s, Stocks, Bonds, Pensions, are all subject to being included under Family Law. So if one spouse had a significant RRSP and the other nothing then the spouse with nothing would be entitled to 50% of the spouse’s RRSP.

Note: the courts adjust the value of the RRSP down, by the amount of withholding tax that would be payable if the RRSP were cashed in. So the figure used is less than fair market value of the RRSP.

To understand this fully the courts ask each person for a statement of assets and liabilities at time of marriage and time of marriage breakdown.

In effect they are doing a net worth statement at two points in time. This is known as net family property (NFP) and the spouse with the RRSP would include it as part of their NFP.

The spouse with the higher NFP would then be required to make an equalization payment to the other spouse so that both share 50-50.

This payment does not have to come from the RRSP or a transfer of the RRSP to settle the payment obligations. It can actually come from any assets owned by the individual with the higher NFP.

Hopefully this gives you some insight on your question about an RRSP and Divorce. To learn more about Family Law, Division of Assets and calculation equalization payments visit Feldstein Family Law Group .

Every attempt has been made to be accurate but Errors and Omissions Excepted.

Have you been through this experience? What did you learn?-Mr.CBB

 Gary Gorr

Guest Post: About Gary Gorr: What kind of written plan do you have for retirement that ensures you won’t outlive your money? I help people answer that question Contact Information: (905) 202-8430 ext.626 ggorr@ifcg.com or you can follow my blog at Gary’s $$$ and Sense 

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Reader Question:Is It Savvy To Cash In My RRSP’s To Pay Off Debt?

Posted: October 22, 2012 in Reader Questions, RRSP
Tags: , , , , , , , , , , , , ,
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A Reader Question about whether it was savvy to cash in an RRSP to pay off Debt was submitted to Canadian Budget Binders Ask Mr.CBB. He forwarded it to me to share my opinion on this topic with all of you.

My short answer is that it depends.

There are several factors to consider:

  • The age of the person
  • The withholding tax on the funds withdrawn on the RRSP
  • The amount of debt and its’ interest rate
  • The type of investment held in the RRSP
  • The opportunity cost of the withdrawal

To keep things simple let me say if you are doing this and are under 30 then it might not be a bad thing. At older ages you have a shorter accumulation period and time and the magic of compound interest work against you.

I have always maintained that paying off debt is one of the best investments someone can make.

Let’s say you’re carrying a credit-card balance of $1,000 with 18 percent simple annual interest. That’s $180 a year in charges. Pay off that debt and you’ve saved $180. That’s the same as investing $1,000 in something that earns an 18 percent return after tax.

Tax Withholding Rates

When you withdraw funds from an RRSP there is a tax withholding. This is a credit due for taxes payable on 100% of the withdrawal and is to be paid by April 30th in the year following the withdrawal. You may indeed owe more than the rate withheld if you have a high income.

Withdrawal Amount Tax Withholding
From $0 to $5,000 10%
From $5,001 to $15,000 20%
Greater than $15,000 30%

So let’s assume you have $10,000 in debt. You are paying the minimum of 3% per month to carry the debt or $300 per month. The debt carries an interest rate of 18%.

Approximately $14,300 needs to be withdrawn to net the $10,000 to pay off the debt. Your savings, the cash flow of $300 per month after the debt is eliminated.

However the real cost may be much greater.

What would the $14,300 be worth at age 65 at 6% yield if it had never been withdrawn?

If you were 35 when you did this, the monies would be worth at 65, $83,281 so you are giving up potential growth on this money in addition to the withholding tax.

Ok, I hear the question already: What if we withdraw, pay off the debt, and invest the $300 a month every month to age 65?

If you indeed did do this, your deposits would be worth $294,354. In this example provided you have the discipline to save the $300/mo. it indeed might work out to eliminate the debt first.

What if our client was able to find savings through budgeting etc. and find an additional $300 per month?

In 19 months he/she would be debt free, their RRSP would be intact, and now they can save even more toward their future.

This Calculator is a handy tool. First enter $10,000, then 18%, then monthly payment of $300.

Under step 2, choose minimum payments. This shows the real cost of paying credit cards on a minimum payment basis.

On page 2, change the monthly payment to $600. See the result? You may want to bookmark this calculator.

Ideally this would be the preferred course of action.

If your RRSP’s are earning low rates of return, such as 2% or 3% it makes it easier to withdraw monies and eliminate the debt.

Your opportunity cost (Put another way, the benefits you could have received by taking an alternative action.) is not very great because of the low yield on the investment.

So there you have my analysis on whether you should cash in your RRSP’s to Pay Off Debt!

What is your opinion?

Would you pay off the debt first?

Look for the savings through budgeting and keep the RRSP intact?

Comments and opinions are welcomed below.

Gary B. Gorr, CHFC

About Gary Gorr: What kind of written plan do you have for retirement that ensures you won’t outlive your money? I help people answer that question CONTACT INFORMATION: (905) 202-8430 ext.626 ggorr@ifcg.com or you can follow my blog at Gary’s $$$ and Sense 

Are you NEW to Canadian Budget Binder?

If you are new Start here!

Do you have a Question to Ask Mr.CBB please click HERE to ask him!

You can Follow Canadian Budget Binder on Twitter HERE or Facebook HERE and Pinterest Here. 

You can also subscribe to Canadian Budget Binder so you don’t miss a blog post. Fill in your email address on the HOME page of the blog off to the left where it says “Subscribe Via Email”- No Spam, I promise!

Are you on Mr.CBB’s Blog Roll? Check HERE… if not and you want me to check out your blog and add you, come introduce yourself.

If you would like to guest post for Canadian Budget Binder please read our guest post guidelines and contact me today.

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