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BMO Financial Group

February 26, 2011 06:00 ET

BMO Study: Troubling Trend Sees Canadians Dipping Into Their RRSPs Prior To Retirement

- Four in Ten Canadians Have Pulled Money Out of Their RRSPs Prior to Retirement

- Main Reason for Withdrawals Is Emergencies, Followed by Debt Payments

- BMO Offers Advice to Avoid Early Withdrawals From Retirement Savings

TORONTO, ONTARIO--(Marketwire - Feb. 26, 2011) - BMO Financial Group today revealed that a significant number of Canadians (four in ten) who hold Registered Retirement Savings Plans (RRSPs) have withdrawn funds before reaching retirement.

"These survey results are worrying; they indicate that many Canadians are not treating RRSPs for their intended use," said Caroline Dabu, Vice President, Retirement & Financial Planning Strategy, BMO Financial Group. "Generally, withdrawing money from your RRSP prior to retirement is something to be avoided if possible. Your RRSP should be a critical component of your overall retirement plan and should only be accessed at retirement." 

Early withdrawals from RRSPs can result in a heavy tax bill, the loss of contribution room and the loss of the potential growth of the investment.

Ms. Dabu does point out that there are some situations when withdrawing money from an RRSP makes sense—such as the purchase of a first home. Under the Home Buyers Plan, you can withdraw up to $25,000 (tax free) from an RRSP and put it towards the purchase of a home. However, you will have to repay all withdrawals to your RRSP within a period of no more than 15 years.

The BMO study, conducted by Leger Marketing, also identified the main reasons why Canadians are withdrawing money early from their RRSPs. These include:

  • Emergencies, such as the loss of a job (36 per cent)
  • Paying off everyday debt, such as credit card balances (26 per cent)
  • A house purchase or home renovation (25 per cent)
  • Education—either their own or their child's (10 per cent)
  • Vacation/Leisure (6 per cent)

"With the right planning and savings tools, there are a variety of alternatives that individuals can explore without having to touch their RRSPs," said Ms. Dabu. "Your first step should be to establish a financial plan that details your cash flow needs and long term savings objectives. Having a financial plan will also help you think ahead to what your contingency plan is in the event of an emergency such as job loss."

Ms. Dabu recommends that Canadians have enough savings readily available to cover living expenses for three months in the event of an emergency.

Other Key Findings:

  • Canadians 35-54 years of age are the most likely to have withdrawn money from their RRSP
  • Those in BC (48 per cent) are more likely than those in other provinces to have pulled out money for an emergency
  • Those in the $100K+ income bracket are more likely to say they withdrew money from their RRSPs for their child's education or their own education (18 per cent)

Looking for alternatives to cashing out your RRSPs should you need immediate access to funds? Caroline Dabu suggests the following:

Set Up a Tax Free Savings Account (TFSA) – TFSAs provide the benefits of tax-sheltered savings and tax-free compounding, allowing your savings to grow. They can hold the same investments as in an RRSP including cash, mutual funds, stocks, GICs and bonds. Also, there are no penalties for the withdrawal of funds.

Get a Line of Credit – Securing a low interest line of credit will provide you with easy access to funds for emergencies or if you want to consolidate and pay off high-interest debt like credit card debt

Think About a Registered Education Savings Plan (RESP) – RESPs can help parents invest for their children's education by offering the benefits of a tax-sheltered investment, coupled with the federal government's Canada Education Savings Grant.

Cut Back on Expenses – Free up cash by foregoing non-essential, regular purchases, like the $10 daily lunch or the unused gym membership. By regularly contributing the money saved towards a TFSA or regular savings account, you will be surprised at how fast you can build up your savings.

The online survey was conducted by Leger Marketing from January 31 – February 2, 2011, with 1510 Canadian adults.

About BMO Financial Group

Established in 1817 as Bank of Montreal, BMO Financial Group is a highly-diversified North American financial services organization. With total assets of $409 billion as at October 31, 2010, and more than 38,000 employees, BMO Financial Group provides a broad range of retail banking, wealth management and investment banking products and solutions.

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