How NOT to deal with your debts Tip of the Day:
Don’t take money out of your RRSP unless you calculate the amount of tax payable and set that amount aside to give the government at tax time – RRSP withdrawals are taxable, and even though your financial institution will withhold some tax, it is most often not enough. You don’t want to pay off a credit card only to have a tax liability next year that you can’t afford to pay.
Here’s the problem: if you take out $1,000 from your RRSP, the bank withholds 10% tax. However, when you file your tax return, that $1,000 gets added to your income, and if your marginal tax rate is 40%, you owe an additional 30% in taxes.
So, if you do cash in an RRSP, calculate the full tax owing, and pay it now.