cashing rrsp with a low interest rate enviroment | RRSPs and RRIFs | Discussion forum

doc said:

with interest rates on rrsps at very low rates, is it just better to cash them in? Reason being you are locked in and your not makeing any real money on your interest anyways, and it seems like interest rates are going down to zero from what i can see.

Cash them in?
and
Reinvest in another product in your RRSP?
or
Pay income tax to cash them in and do what with the proceeds?

The answer truly lies in your financial situation --- namely, how much you hold in RSP balances and what your marginal tax rate?

Remember even a GIC with 3.25% interest rate in your RSP is generating a tax deferred return of the same value --- meaning you pay no tax until you begin withdrawing on it. Also remember that the full amount of your disposed RSP must be taken as income the year in-which it is cashed-out. This could also create additional tax consequences in the shorter-term.

Me...I keep everything I can tax deferred from our government.

This doesn't make any sense! If you take your cash out of RRSPs, you pay tax and then face the problem of where to re-invest your money. If you have high-interest debt and are not in the highest tax bracket, certainly you might (do the math) consider using it for that.

First, max out your TFSA before considering RRSPs. In today's tax environment, the income tax rates are lower and you'll save less when contributing. On the other hand, you don't want a lot of RRSP income when you retire because it appears on income and may cost you part or all of your pension, medical, program access or rent subsidy benefits.

If you do withdrawals, never allow one withdrawal to be for more than $4,999.99 - that way your tax witholding will be only 10%. If you expect to pay less than that in tax, do it near the end of the year, so you can reclaim that money on your tax return early in the year. If you will have to pay tax at a marginal rate HIGHER than 10%, though, take it out at the START of the year so you will have an interest-free year with the difference in your pocket.

IN EITHER CASE, MAKE SURE YOU WILL HAVE CASH TO PAY THE TAXES WHEN THEY ARE DUE!

Because RRSP withdrawals almost always incur fees and they tend to sit for long terms, financial institutions often offer better RRSP rates than in non-registered investments. Think about that before chasing rates.

If you have some years where you are unemployed or a student, you may be able to take advantage to get cash out of your RRSP at low tax rates and not lose income-tested retirement benefits.

Almost nothing it worth investing in if you have any high-interest debt; pay that first.
ED BEAR