Atlantic Canadians who tap into their registered retirement savings plans (RRSP) to make ends meet are withdrawing more money from those investment vehicles than Canadians in any other part of the country.
“If there are a lot of jobs in a province, it gives people a lot of flexibility in what they want to do,” portfolio manager Robert Armstrong, a BMO Global Asset Management vice-president, said in an interview Thursday. “But in Atlantic Canada … people will raid their RRSPs sooner than they should.”
BMO Financial Group released the second part of its eighth annual Registered Retirement Savings Plan study Thursday. It shows Canadians throughout the country are dipping into their retirement funds far too often.
According to the study, 41 per cent of Atlantic Canada residents have made a withdrawal from their RRSP. That’s only slightly more than the 40 per cent figure for the rest of Canada.
But the typical Atlantic Canadian withdraws considerably more from his or her RRSP, about 12 per cent more, with an average withdrawal for the four Atlantic Canadian provinces of $23,505 compared to $20,952 for the rest of the country. The amount of the money Atlantic Canadians withdraw from their RRSPs is the highest of any region of Canada.
That can leave Atlantic Canadians forking over a lot of extra money to the taxman.
“It’s a massive cost,” said Armstrong. “If someone had living expenses they needed to cover, the first place to get the money from is your tax-free savings account.”
The precise tax implications of withdrawing funds early from an RRSP vary depending on an individual’s income tax bracket. But it’s often thousands of dollars in extra income taxes.
According to Armstrong, someone with an average income could expect to be in a roughly 40 per cent tax bracket, meaning that withdrawing $23,505 from his or her RRSP would result in $9,402 more being due to the government in income tax.
On the Prairies, the average amount of money withdrawn from RRSPs is $12,374.
Although Atlantic Canadians are withdrawing more money from their RRSPs than other Canadians, the trend for this region is going in the right direction. In the past year, the average amount Atlantic Canadians have withdrawn from these investment vehicles has gone down by $1,980, from $25,485 last year.
In the rest of Canada, the situation is getting worse. The average Canadian withdrawal from RRSPs has risen by $3,739 to $20,952. That’s still a smaller number than in Atlantic Canada, but the trend is going in the wrong direction, said Armstrong.
“The trend across Canada is a bad trend. When I look at Atlantic Canada, it’s just a bad number,” he said. “RRSPs are supposed to be for your retirement and when you take that money out for living expenses … that’s a bad thing. People are living beyond their means.”
But it’s not always a financial faux pas to take funds from an RRSP to cover expenses.
There are ways to withdraw money from an RRSP without being hit hard by the taxman. First-time homebuyers, for example, can use those retirement funds under the Home Buyers’ Plan, and Canadians who want to go back to school can take advantage of the Lifelong Learning Plan, usually without paying a penalty in terms of extra income taxes.
According to the BMO study, the top four reasons why Atlantic Canadians withdrew money from their RRSPs were to buy a home (30 per cent), to pay for living expenses (23 per cent), to pay off debt (21 per cent) and to cover emergencies (17 per cent).
“The worst reason is to pay for living expenses,” said Armstrong. “A lot of people today don’t have a pension plan and don’t understand that they have to do more than their parents did … because they had workplace pension plans. Their employers took care of them.”
The portfolio manager said Canadians should only ever withdraw money from their RRSPs as a last resort.
Atlantic Canadians are currently less likely to save or invest money this year, the BMO study shows. It reveals 43 per cent of Atlantic Canada residents are not planning to contribute at all to their RRSPs this year.
Atlantic Canadians are also less likely than are other Canadians to put money into their savings accounts or sock those funds away in an investment plan such as an RRSP or a tax-free savings account.