Decreased energy, changes in routine, loss of income: Sick leave often comes with its share of uncertainties and daily disruptions. In this situation, it's natural to wonder if you should dip into your RRSP or other savings to get through this period.
The answer depends on your situation! Here's what you need to know to make an informed decision.
Get a clear picture of your finances
Before withdrawing funds from your RRSP, take time to ask yourself these four questions:
- Do you have access to replacement income, such as disability insurance, critical illness insurance, or employment insurance sickness benefits?
- Do you have an emergency fund?
- What expenses can be eliminated, reduced, or deferred?
- Do you really need to draw from your savings right now, or can you wait a few months?
Take time to fully understand your RRSP
RRSPs are savings vehicles with specific rules. Before withdrawing, make sure you fully understand them.
- An RRSP is designed to help fund your retirement. It offers long-term, tax-sheltered savings growth, ensuring you'll have an income when you stop working.
- Withdrawing funds too early can be costly. Amounts withdrawn from an RRSP will be added to your taxable income for the year. An adjustment may be required at the end of the tax year, and you may have to pay additional taxes when filing your tax return.
Is your RRSP with the Fonds an option?
Some investments require you to meet specific criteria when withdrawing funds before retirement. This is particularly true of locked-in retirement accounts (LIRAs) and RRSPs that include labour-sponsored funds, such as an RRSP with the Fonds de solidarité FTQ.
Criteria for withdrawing funds from your RRSP with the Fonds before retirement
In return for your commitment to Québec's economic development, buying Fonds shares entitles you to 30% tax credits.[1] This type of savings is designed for the long term, so early withdrawals are subject to specific criteria. Examples:
- You suffer a temporary disability accompanied by a reduction in income.
- You need to pay for medical expenses.
- You or a loved one has a critical, incurable illness.
To learn about other eligible scenarios, see Fonds shares redemption criteria.
Assess the tax implications of an RRSP withdrawal
Withdrawals from your RRSP will be added to your taxable income for the year. While tax is automatically withheld at the time of withdrawal, the actual cost may be higher when filing your tax return, depending on your total income.
| Withdrawal amount (in dollars) | Withholding tax |
|---|---|
| From $0 to $5,000 | 19% |
| From $5,001 to $15,000 | 24% |
| Over $15,000 | 29% |
Important
Unlike a tax-free savings account (TFSA), you cannot recover RRSP contribution room after a withdrawal.
Consider other ways to retain your retirement savings
Here are a few options that might help you avoid withdrawing money from your RRSP.
Use cash and your emergency fund
If available, turn to these resources first. Emergency funds are intended to help you weather tough times and avoid using your long-term savings.
Several types of coverage can help replace some of your income while on sick leave:
- Disability insurance, individual or group plan, offered through your employer
- Critical illness insurance if you have a policy
- Employment insurance sickness benefits, depending on your eligibility
Do you have this type of coverage? Submit a benefits claim as soon as possible. Some insurance plans impose a 30- to 90-day waiting period before paying benefits, and employment insurance claims can take several weeks to process.
Note
Employment insurance benefits are taxable. The same goes for disability insurance benefits if your employer pays the premiums.
Withdraw from your TFSA
TFSA withdrawals will not be added to your taxable income. Plus, you'll recover contribution room on January 1 of the following year, enabling you to rebuild savings once your situation stabilizes.
Reduce or temporarily suspend contributions
Temporarily suspending RRSP or TFSA contributions can ease any immediate strain on your budget without affecting what you've already built up. Your savings will remain intact and continue to grow, even while you're on leave.
Prioritize your expenses
Take some time to distinguish between essential and non-essential expenses. Certain costs are unavoidable, like housing, food, and medication, but items like subscriptions and outings could be reduced or temporarily suspended.
Prioritizing your expenditures could give you some flexibility.
Make an arrangement with your financial institutions
Some financial institutions may agree to temporarily defer payments when you can document a difficult situation. Whether for mortgage, credit card, or loan payments, it's worth inquiring.
Make informed decisions with My Game Plan
Would you like to calculate the impact of a withdrawal on your retirement plan? My Game Plan can simulate various scenarios and show you exactly how they would affect your savings.
Get support from other resources
We know that illness can monopolize your focus and make it very difficult to keep track of your finances.
Several resources are available to provide you with a clearer picture of your financial situation.
- A financial planner can help you conduct a comprehensive review of your finances.
- A social worker (link in French) can refer you to assistance programs for which you may qualify.
Options for retirement ... and when life gets complicated
Sick leave can lead to difficult financial decisions, but with the right information and resources, you can get through this period without jeopardizing your future. We are here to help you see things clearly and keep your finances on track.
