RRSP Withdrawals & Bankruptcy Payments
Twelve years ago, the Canadian Parliament updated the Bankruptcy and Insolvency Act to allow for the protection of retirement savings plans (RRSPs).
Now, any funds contributed before the year preceding bankruptcy filings are exempt from seizure.
The goal behind this decision was to enable those in dire financial straits to keep their savings for the future.
Many wonder what happens to funds withdrawn from an RRSP when in a state of bankruptcy.
Perhaps you are looking for fluid cash and need to understand what the fate of these monies will be.
In this case, it is critical to understand that anything you withdraw is not protected.
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Once removed from the RRSP, the cash becomes the same as any other liquid funds and is subject to the same rules.
If you do make a withdrawal (or have already) then you must inform your Trustee forthwith.
When you tell them, there are two possibilities.
They can either tell you to deal with the withdrawn funds as regular income and place it under the surplus income regulations or they can take the full funds and allocate them according to your bankruptcy proceedings.
Bankruptcy enables your Trustee to have the executive decision on any and all of your funds.
They make determinations on a case by case basis.
It helps to understand that, regardless of what your Trustee chooses to do, you are on the hook for paying income taxes related to any amounts withdrawn.
When filing your upcoming taxes, whether they are a after your bankruptcy or during, the total withdrawn amount gets added to your taxable amount.
In the event that this causes you to need to pay additional tax amounts, you are still responsible for paying off this debt.
It does not go under the cover of your bankruptcy.
Therefore, it is essential to be very prudent with respect to all options you have.
Consider the possibilities of withdrawing from an RRSP if you are in a state of bankruptcy.
The wisest decision is to discuss your choices with your Trustee prior to taking any action.
With their advice, you can make the best possible choice for your financial future.
You can get an understanding of how they will treat the amount so that you have a full picture of the situation before making your decision and avoid any unnecessary losses due to tax.
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?