The impact of early withdrawal

Considering taking money out of your group retirement or savings plan for an emergency expense? Maybe you want to pay down your debt faster or buy that new car sooner?

Withdrawals jeopardize your retirement income in the future and can cost you thousands of dollars in taxes today. Don’t sacrifice your retirement income before you know the facts.

Taking money out of your group plan means you’ll have less money when you retire. But it’s much more than that. You’ll miss out on the power of compounding returns, a key to increasing your savings over the long term. If you withdraw, say, $10,000 at age 37, you could have $51,000 dollars less when you retire.* That’s a lot of money.

And if you withdraw money closer to your retirement – say $10,000 at age 47 – you’d have $28,000 less in savings when you retire. That’s nearly three times the money that you withdrew.

What about taxes?

Taking money out of a registered retirement plan isn’t as simple as a withdrawal from a bank account. If you take money out of your plan, your financial institution is required to withhold a portion of your money and send it to the Canada Revenue Agency (CRA) as income tax on the withdrawal. In some provinces, this tax can swallow up to 30 per cent of your withdrawal before you ever see the money.  And when you file your income taxes, you’ll have to claim the money you withdraw as income.  Depending on your tax bracket, you may have to pay more money in taxes than your financial institution sent to the CRA on your behalf.

When you need money, it’s tempting to see your group plan as a source of cash. But when you take money out of your group plan early, you lose more than you might think. Leave your money invested and watch your savings grow.

* Assumes retirement at age 65 and a six per cent annual rate of return.