Cashing in RRSPs

Question

An insurance salesman/investment adviser is trying to convince my wife, who is currently a homemaker with no income, to withdraw her RRSPs a little each year and invest that money in a non-registered account with him. Since the withdrawal amount would be just below the threshold for income tax, and because my wife has no other income, no taxes would be owed. I should mention that we only have an insurance policy with him so he is eager to get more of our business. On the other hand, its been drilled into me that you shouldn’t touch RRSPs until retirement or unless absolutely necessary. In fact, I asked our current portfolio manager about this and he is dead against it, but I’m not sure if his intentions are true either. Is this a good idea?

Answer

No. This is not a good idea. In fact, it is a bad idea. It does not make sense to liquidate your wife’s RRSP’s to help this salesman/adviser build his assets. I’m concerned about his motives and I can’t see how this plan would benefit you and your wife. Here’s why:

“Don’t touch your RRSPs unless absolutely necessary”

As you say, you have had the “don’t touch” philosophy drilled into you. The main reason for that—aside from the risk of triggering a tax bill—is because it protects you from yourself. Having your retirement savings in a registered plan makes it harder to access the money and therefore harder to spend. Some people choose to borrow from their RRSPs, to help them fund a home or pay for education, but they have to pay that money back. Withdrawing the money to invest is folly.

Don’t let the taxman “touch” it either

Income earned on money in a non-registered account will be taxed. Held in a registered retirement savings plan, it can grow without being taxed, until it is withdrawn. True, your wife can withdraw a little each year from her RRSP and avoid an income tax hit, but whatever those new investments earn in the non-registered account will be taxable. An RRSP is intended for “retirement,” not to supplement low-income years while you’re raising your kids.

Don’t settle for an asset hungry investment adviser

There are many excellent investment advisers out there—men and women who really try to understand what their clients want and then develop a plan to help them get it. By doing good work, they earn referrals and their business grows. It sounds like this guy is trying to sell you on bringing your assets to him without first understanding what it is that you want. And that makes me worried that once he has those assets, he might take other measures to make the most of his commissions. For example, he might put your wife into high MER mutual funds or ones with deferred sales charges that generate a nice payout for him upfront. Not cool.

Do review RRSP performance over time

I have given you three don’ts. Let me finish with one do. While this issue has your attention, review the performance of your wife’s RRSP over time. How has it been performing versus the relevant benchmark index? Remember the rule was don’t touch, not forget. You still need to keep an eye on performance over time to ensure that your money is growing for you.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.