Cashing in RRSP’s and Divorce

Cashing in RRSP’s and Divorce

In a recent Yahoo!Finance article, the author, Andrew Button, wrote that the average RRSP account that many Canadians have at age 71, is less than $300,000.

To make a simplistic illustration, let’s assume that a couple are divorcing at age 65.  If the amount of the couples RRSP is $300,000 and is totally in woman’s name, then her retirement income will be even smaller.  Why?  Because assets need to be split and/or, her RRSP’s will have to be cashed in.  There are all kinds of costs that are not considered when going through divorce such as legal fees, new furniture, taxation, a new car to name just three things.

For most people, RRSPs are often their largest savings other than the equity that they have in their house. If you must cash in RRSPs to pay bills remember this reality:

Use the following withholding rates for lump-sum payments:

10% (5% for Quebec) on amounts up to $5,000

20% (10% for Quebec) on amounts over $5,000

30% (15% for Quebec) on amounts over $15,000

CRA emphasizes that these rates are only estimates. Since no tax is withheld at source on the minimum amount, annuitants of these plans are required to pay the tax attributable to such payments no later than April 30 of the year following the year in which they are received, unless they are required to make instalment payments.  Also, if the annuitant is earning income, the cashed in amount must considered at tax time as well.  Always check with your financial advisor, about the implications of cashing in RRSP’s.

To make this clearer, let’s assume that a legal bill of $10,000 needs to be paid.  To get the $10,000 after tax from the RRSP, $12,500 must cashed in (12,500 – 20%).  The RRSP balance has reduced from $300,000 to $287,500.00 ($300,000 – $12,500)

Divorce comes with many costs, some of which are obvious and some of which are not.  For many people, working longer into one’s senior years is often reality.

Note:  I am in favour of marriage!  Healthy and happy families are the primary units of a strong and vital society and should be encouraged!  Like all noble endeavours, it takes hard work, sweat and tears to make something beautiful and worthwhile!  If divorce is the route a couple take, then make the break clean, quick, and efficient… your financial future depends on it!