Feeling some uncertainty after a job loss is completely understandable. How long will your money last? Should you withdraw funds from your RRSP? How will your finances be affected? The answers will depend on your situation, but there is a logical approach that can help you protect your financial future.
Start by checking whether you are eligible for income replacement benefits such as employment insurance or severance pay. Then, use the money in your emergency fund before turning to your TFSA, your non-registered investments, or as a last resort, your RRSP. Let's walk through the steps.
Take a financial snapshot
Get a clear picture of your future income and expenses. Could making a few tweaks help you get by without touching your savings, at least for a while?
Replacement income: The first thing to check
Are you eligible for employment insurance? If so, apply as soon as possible. These benefits usually correspond to 55% of your insurable weekly earnings, up to an annual cap.
Did your former employer provide any severance pay? This money could really help make up for your lost wages.
If you are eligible, these funds can act as your initial safety net. One important detail to keep in mind: income replacement benefits will be added to your annual income and are taxable.
Put certain expenses on hold
Certain subscriptions, purchases, and projects can wait a few months. You may also decide to reduce or pause your TFSA and RRSP contributions. These changes can help you hold on to the savings you've already accumulated. They'll remain invested and continue to work for you.
Temporarily adjusting your budget to focus on the essentials can help you go much longer before having to touch your savings.
Make informed decisions with My Game Plan
Are you wondering about the impact of pausing your retirement contributions? My Game Plan lets you simulate different scenarios and see exactly how they'll affect your retirement plan.
Use your savings in the right order
If you need to use some of your savings, withdrawal order matters—both from a tax perspective and from a retirement perspective.
Which savings should you use first if you lose your job?
| Savings | Accessibility | Tax impact |
|---|---|---|
| 1. Emergency fund | Immediate | None |
| 2. TFSA | Fast (a few days) | None on withdrawal |
| 3. Non-registered investments | Fast (a few days) | Tax on 50% of the capital gain |
| 4. RRSP | Possible, subject to certain conditions | Withholding tax + added to taxable income |
| 5. Pension plan / pension fund | Limited, subject to certain conditions | Added to taxable income if cashed out |
Please note that this order can be adjusted to reflect your situation and your investments. For example, it might be more advantageous to withdraw funds from your non-registered investments before your TFSA if you have realized capital losses in the current year or in previous years. If you have any questions, talk to a financial advisor.
01 Emergency fund
If you have an emergency fund, now is the perfect time to use it. You will be using it for its intended purpose: to give you peace of mind. This solution will have the smallest impact on your financial future.
How much should you save in an emergency fund?
The general recommendation is three to six months' worth of essential expenses in an easily accessible account, such as a regular savings account or a high-interest savings account.
02 TFSA
Your TFSA is often the best asset to use after you've depleted your emergency fund. Withdrawals are not taxed, and your contribution limits renew on January 1 of the following year, giving you the opportunity to replenish your TFSA savings once your situation has stabilized. It's a much better option than an RRSP for getting through a transitional period.
03 Non-registered investment accounts
If you hold stocks, mutual funds, or other investments in a non-registered account, consider using this money before tapping into your RRSP. The tax impact is usually less significant: Only half of the realized capital gain is taxable, unlike with an RRSP, where the total amount withdrawn is added to your income.
04 RRSP
This option is the one that tends to cause the most concern. In short: withdrawing from your RRSP is possible, but only as a last resort. Why? Because the withdrawal amount is added to your taxable income for the current year and, unlike with a TFSA, used RRSP contribution room cannot be recovered.
Please note that income tax is automatically withheld at the time of withdrawal:
- 19% for amounts under $5,000
- 24% between $5,000 and $15,000
- 29% for amounts over $15,000
These rates do not necessarily reflect your actual tax rate: an adjustment may be required when you file your tax return.
05 Retirement plans
If you have a pension fund with a former employer, the funds are generally locked in until retirement, but there are exceptions.
You may be able to access your funds if you have a small balance in the plan. You may also request a reduced annuity as early as age 55. Contact the plan administrator to find out what terms and conditions apply to your situation.
In addition, funds in a locked-in retirement account (LIRA) can sometimes be withdrawn starting at age 55.
Can I withdraw funds from my RRSP at the Fonds if I've lost my job?
Yes, under certain conditions. For example, you must be able to show that your income has decreased by at least 20% over the past two months or longer. The redemption of Fonds shares is only permitted as a last resort. You must first liquidate all your liquid investments, including any other RRSPs.
When to dip into your savings to avoid going into debt
Your instinct may be to protect your savings at all costs. But when it comes to certain types of debt, this approach isn't beneficial.
Credit cards and high-interest lines of credit accrue interest that adds up very quickly. Unpaid debt can weigh on your finances for years, long after you've started a new job. Using part of your emergency fund or TFSA to stay out of debt is often the most sensible decision in the short term. The goal is to be strategic about buying time while minimizing long-term impact.
Implement a temporary strategy, not a perfect plan
Losing your job is a transitional period during which it's best to remain flexible. Set a timeframe of two to three months and review your budget regularly. Your situation will change. Make adjustments to your strategy without any self-judgment.
What should I do when my situation improves?
The adjustments you make today are designed to get you through a difficult time. Adapting your saving habits to this reality is perfectly normal and doesn't define your entire financial life. Once you find a new job, you can refocus your energy on getting your finances back on track, one step at a time.
