02/25/2016 11:32 EST | Updated 02/25/2016 11:59 EST

Canadians Raiding Their RRSPs To Make Ends Meet: Survey

Consider a rainy-day savings fund instead.

With the RRSP contribution deadline fast approaching on Feb. 29, a new survey from BMO has discouraging news about how Canadians use the retirement savings plan.

More than one in five have raided their RRSP to make ends meet, a strategy that a BMO wealth strategist describes as “not advisable.”

The survey found 21 per cent of Canadians have taken money out of their RRSP to cover living expenses or pay off debt, while 15 per cent took money out to cover costs after an emergency.

Only one-third have paid the money back into their RRSP, and one-quarter say they will likely never pay it back.

“Although it’s not advisable to make withdrawals from an RRSP, it’s clear that some Canadians have had to do so in order to meet short-term needs,” said Chris Buttigieg, a financial planning strategist at BMO Wealth Management.

There can be a significant tax bite to taking money out of an RRSP. There is a withholding tax of 10 per cent to 30 per cent, depending on the amount withdrawn, and on top of that, the money taken out has to be declared as income, to be taxed again.

That’s not the case when making withdrawals to buy a first home under the Home Buyers Plan, or when covering education costs under the Life Long Learning Plan.

The BMO survey found Canadians most often take money out of their RRSPs to pay for homes, with 25 per cent having done so.

The average amount withdrawn is $15,908.

“Making an RRSP withdrawal to free up funds should only be considered as a last resort,” Buttigieg said. Instead, he suggests opening a rainy-day savings account, like a TFSA, to help cover costs when things get tight.

A separate survey from H&R Block found only 18 per cent of Canadians plan to contribute to an RRSP ahead of the Feb. 29 deadline. The survey found only about half of Canadians understand the difference between RRSPs and TFSAs — including the fact that RRSP contributions are tax deductible, while TFSA contributions are not.

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