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Should I Withdraw From My RRSP to Pay Off Debt? (Canada 2026)

Updated

When debt is crushing you, cashing out your RRSP can feel like the obvious solution — the money is right there. But RRSP withdrawals are fully taxable, and the real cost is almost always higher than people expect. Here’s how to decide whether it actually makes sense.

The real cost of an RRSP withdrawal

RRSP withdrawals are added to your taxable income in the year of withdrawal. This means:

  1. Withholding tax applies immediately: 10% for withdrawals under $5,000, 20% for $5,001–$15,000, and 30% for amounts over $15,000 (rates vary slightly in Quebec)
  2. Your marginal rate on withdrawal may be higher: the full amount is included in your income; if you’re already earning $60,000, withdrawing $20,000 pushes you to $80,000, taxed at your marginal rate for that bracket
  3. RRSP contribution room is permanently lost — unlike a TFSA, the room you used is not restored when you withdraw

Example:
You earn $60,000 and withdraw $20,000 from your RRSP to pay off credit card debt at 20% interest, bringing your total income to $80,000.

  • Withholding tax: $6,000 (30%)
  • At tax time, that $20,000 adds about $6,080 in federal and Ontario income tax (2026 rates). The combined marginal rate in this income range is 29.65% (federal 20.5% plus Ontario 9.15%), and the Ontario Health Premium also rises slightly
  • The withholding is close to that amount, so little or nothing extra is usually owed at filing (the exact result depends on your other income, deductions and credits)
  • Net: you still forfeited $20,000 in RRSP room and decades of future compound growth to free up roughly $13,920 after tax. The room, not the tax, is usually the bigger long-run cost at this income level

When withdrawing from RRSP may make sense

Despite the tax hit, there are situations where it’s the least-bad option:

1. Very high-interest debt you can’t service

If you have $20,000 in high-interest debt, such as credit card balances at 20% or more, that you cannot service from income alone, the compounding interest may exceed the tax cost of an RRSP withdrawal. Run the numbers: compare the ongoing interest cost against the net proceeds after tax.

2. Facing insolvency or bankruptcy

If you’re considering a consumer proposal or bankruptcy, speak with a licensed insolvency trustee before withdrawing anything. Under the federal Bankruptcy and Insolvency Act, property in an RRSP or RRIF is generally excluded from what creditors can claim in a bankruptcy, except contributions made in the 12 months before the bankruptcy, so cashing out an RRSP to pay creditors can mean giving up money you might otherwise have kept.

3. Low-income year

If you’ve been laid off, taken parental leave, or have unusually low income in a particular year, withdrawing from your RRSP in that year means a lower marginal rate applies. Strategic withdrawals in low-income years can minimize the tax hit. For example, withdrawing $15,000 while earning $20,000 keeps total income in the lowest federal bracket, taxed at 14% federally in 2026, far less than the rate on the same withdrawal while earning $90,000.

4. Small RRSP with limited growth potential

If your RRSP balance is small (under $10,000) and you’re paying high-interest debt, the lifetime forgone growth may be modest relative to the immediate debt relief. At a combined marginal rate of 20% to 40%, a $5,000 RRSP withdrawal costs $1,000 to $2,000 in tax, compared with about $1,000 a year in interest on a $5,000 balance at 20%.

Better alternatives to consider first

Before withdrawing from your RRSP, exhaust these options:

AlternativeNotes
TFSA withdrawalTax-free, room restored, no cost
Debt consolidation loanLower rate than credit cards; no tax
Balance transfer credit card0% promo period; no tax
Home equity / HELOCSecured low-rate credit if you own a home
Negotiate with creditorsPayment plans, interest reduction
Consumer proposalLegal protection; doesn’t require RRSP liquidation
Credit counsellingNon-profit debt management programs

See also: debt consolidation strategies in Canada and how to get out of debt in Canada.

The TFSA first rule

If you have both RRSP and TFSA savings, withdrawing from the TFSA first is almost always the better move. TFSA withdrawals:

  • Are not taxable income
  • Don’t push you into a higher bracket
  • Don’t affect government benefits (OAS, GIS, EI, child benefit)
  • Restore contribution room the following January 1

It’s best to avoid touching the RRSP until TFSA funds are exhausted.

If you must withdraw from your RRSP

Minimize tax damage:

  1. Withdraw in your lowest-income year possible
  2. Spread withdrawals across multiple years if you can (to stay in lower brackets)
  3. Withdraw only what you need to pay off the highest-interest debt
  4. Plan for any extra tax at filing: withholding is only a prepayment, and any shortfall is due with your return

The Home Buyers’ Plan is for buying a home, not paying debt: if you are about to buy or build a qualifying first home, you can withdraw up to $60,000 from your RRSP under the HBP without it being taxed, as long as you repay it over 15 years. It can’t be used to pay off other debts.

Frequently asked questions

Is RRSP withdrawal ever a good idea for debt? Yes — if the debt interest rate is very high, if you’re in a low-income year, or if the alternative is insolvency. But it should generally be treated as a last resort after exhausting tax-free options (TFSA) and lower-cost debt solutions.

Can I re-contribute to RRSP later to replace what I withdrew? No. Unlike a TFSA, RRSP contribution room is not restored when you withdraw. The room you used is gone permanently. This is why RRSP withdrawals are so costly — not just the tax paid now, but the compound growth you’ll never recover.

What happens to the withheld tax? Withholding tax is remitted to CRA immediately by your financial institution. At tax time, it counts as a prepayment toward your annual tax bill. If the tax on the withdrawal at your marginal rate is less than what was withheld, you may get some of it back. If it’s higher, you’ll owe the difference.

Does withdrawing from an RRSP affect my EI, CPP, or child benefits? RRSP withdrawals increase your net income, which can reduce or eliminate income-tested benefits such as the Canada Child Benefit (CCB), the Guaranteed Income Supplement (GIS) and the Canada Groceries and Essentials Benefit (formerly the GST/HST credit). CPP benefits are not income-tested, so a withdrawal does not reduce them. If you received EI regular benefits, the higher net income can increase the EI benefit repayment at tax time. It helps to estimate the effect on benefits before withdrawing.

Sources

The figures and rules on this page come from these sources, last checked against them between August 29, 2026 and September 25, 2026. How we check facts.