26 - Wednesday, January 30, 1991 - North Shore News BUSINESS Cashing in RR EACH YEAR at this me financial advisers and institu- tions urge people to put money into registered retirement savings plans. Yet you might well be tempted to take money out of your RRSP — to pay down debt ar even to spend. “A married couple came to me recently with plans to cash in their $15,000 RRSPs to help pay down their $36,000 line of credit, money they had used to buy a car and do some home renovations,’’ said Susan May, client service officer and partner in Royal Trust’s West Vancouver branch. The woman, 34, $25,000; the man, 37, $42,000. They did not have children. “They felt it would be finan- cially beneficial for them to redeem their total RRSP holdings to pay down their line of credit,” May said. ‘‘l did some calcula- tions to show what would happen. “First, the most they could hope to realize would be $13,500 — by making three $5,000 withdrawals so only 10 per cent income tax would be withheld. ‘“‘However, the husband would actually have to pay $4,070 tax on his RRSP withdrawal and the wife $1,330 on hers. That's a total cost of $5,400. Because only $1,500 tax was withheld, they would have to pay another $3,900 tax by April 30 next year."’ However, said May, the biggest cost of cashing an RRSP is loss of the future tax-sheltered growth. “For the husband, that cost came to $144,210, which is the total his RRSP would grow to compounding at 10 per cent until age 65,"" May said. *‘The wife's loss was $95,972." Even if the couple ended up paying an average of 35 per cent tax when the funds were eventual- ly withdrawn, they would still be sacrificing more than $156,000. “On the other hand,’’ said May, ‘‘the benefit over the next year of paying down the 13.25- per-cent line of credit by $13,500 would be $1,788.75. That's a rela- tively small benefit compared with the present tax cost and future opportunity cost of cashing the RRSPs.”’ May suggested the couple keep their RRSPs, consider other debt reduction approaches and ‘‘meet with a qualified financial planner to develop both cash management and [ax strategies.’ But the cou- ple ignored her advice and cashed their RRSPs anyway. “It’s really frustrating when clients feel cashing an RRSP is the only way to pay down debt,"’ she said. ‘*} see RRSPs as long-term savings vehicles. Only when peo- ple have little or no income should they consider this approach to USE YOUR earned earned plan to reducing debt."” Its tempting to go for the “quick fis."° Too often, however, you run up your debts again —- only this time you have no RRSP. Using non-RRSP tunds to pay off debt can make more sense, especially if you then redirect your former debt payments to rebuild your savings. May said another couple, also in their mid-30s but with plans to have two children in) the near future, asked her about the best way to use the extra $300 a month they have. “They were some money wondered if already putting into RRSPs and they should con- Michael Grenby DOLLARS AND SENSE tribute more or increase the mor- (wage payment on the home thes had just bought,” said May. “Beeause the wife planned to work only part time after having the children, [ suggested she mike the maximum contribution to her own plan and the husband make his maximui contribution Co a spousal! plan for her. “This approach to income-split- ting will save them money in the future, when the wife eventually withdraws the RRSP funds in her lower tax bracket — subjeet to the three-year attribution rule. “Once they have made their maximum RRSP contributions, any monthly savings they still have — and any tax refund they receive — could then go toward paying down the mortgage more quickly."’ Starting with the 1991 tax year, If you’re a fisherman, the anti-exposure worksuit could mean the Ps can cost you can skip the RRSP contribu- tion vou are entided to make and catch up in the future, So you could pay of f vour debt, then redirect your former monthly payments to a catchup RRSP program, However. some people respond oniv to the discipline of the debt collector and once the debt is gone, just can’t manage to save those former payments, Mike Grenby is a Vancouver- based columnist and independent personal financial adviser who will answer your questions as space allows in his column, Write to him c/o North Shore News, 1139 Lonsdale Ave., North Vancouver V7M 2H4. overboard. And it’s made so you can work comfortably, replacing your wet gear and your life-jacket. Many fatalities can be prevented if fishermen wear anti-exposure worksuits. So make it vour next investment. ..for life. difference between life and deach. It's designed to protect you on deck in cold, wet weather, as well as helping to protect against hypothermia and drowning should vou go HEAD, SAVE YOUR HEART. Cut down on Saturated fats— that’s eating hearty baproviny your odds ayhst S yo Catihia’s BT Asics Canadian Garde cétiére Coast Guard canadienne ad For heartening information cai! 1-800-663-2010