02/08/2017 12:53 EST

Wealthier Canadians Saving More While Others Raid RRSPs To Survive

One in five Canadians have withdrawn money from an RRSP to make ends meet.

One in five Canadians have withdrawn money from their RRSPs to cover living expenses or debt, a new study finds, a clear sign that a rising cost of living and heavy debt burdens are putting financial pressure on households.

The study from Pollara, carried out for the Bank of Montreal, also found Canada is experiencing a case of “savings inequality,” as fewer people are adding to their retirement savings, but those still saving are able to save more.

Fewer Canadians are saving for retirement, while others are raiding their savings to make ends meet. (Photo: Shutterstock)

The average Canadian with an RRSP withdrew $17,213 from their plan in the past year, the survey found, up from $15,908 the year before.

Twenty-one per cent said they did so to cover living expenses, while 18 per cent said they withdrew money to pay off debt. In all, 38 per cent of RRSP holders have withdrawn money from their plan.

Still, the most common reason cited was to buy a home, most likely under first-time Home Buyers' Plan, which allows homebuyers to withdraw from an RRSP without taking a tax hit.

But for most other reasons, withdrawing from an RRSP means paying taxes on that money — first a withholding tax of 10 to 30 per cent, and then likely paying taxes on that money again, as part of the income tax.

“It’s concerning to see that so many Canadians are dipping into their RRSPs to meet short-term needs, which should only be considered as a last resort,” said Chris Buttigieg, director of wealth planning publications at BMO Wealth Management.

Buttigieg suggests talking to a financial professional “to make sure you have fully considered the ramifications of the early withdrawal tax consequences, and to consider any additional options that may be available to you.”

Savings inequality

Pollara's poll also found a growing divergence between Canadians who are in a position to save and those who aren’t.

The number of people contributing to RRSPs is declining, with forty-six per cent saying they will contribute ahead of this year’s March 1 deadline, down from 50 per cent the year before.

But those who are saving, are saving more. The survey found the average contribution to an RRSP this year will spike by nearly 28 per cent, to $5,088 from $3,984 the year before.

The top reasons for not contributing were not having enough money (42 per cent) and having other expenses that come first (28 per cent).

The poll of 1,500 Canadians was carried out between Dec. 14 and Dec. 19, 2016. It has a margin of error of 2.5 per cent, 19 times out of 20.

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