RRSP in Bankruptcy: Can I Keep My RRSPs When Going Bankrupt?
RRSPs & Bankruptcy
What is an RRSP and how does being bankrupt affect your RRSP?
We discuss this and more below.
What Does RRSP Stand For?
An RRSP or Registered Retirement Savings Plan is an investment vehicle and a retirement savings plan.
You can save your pre-tax money into this savings plan and withdraw it after it grows tax-free.
Even after this money is withdrawn, you are only made to pay nominal taxes on it.
How is an RRSP a Safe Deposit Option Even During Bankruptcy?
An RRSP is usually governed by the Bankruptcy and Insolvency Act; all your RRSP funds -minus any contributions in the 12 months prior to your bankruptcy -are safe from your creditors.
No matter who makes the payment to this retirement plan, you or your employer, the money stays safe.
However, the above only applies for locked-in RRSPs in bankruptcy.
For any other RRSPs in bankruptcy, the account is liquidated and the money transferred to your creditors.
A locked-in RRSP usually results from a company offering a pension plan to its employee, but the employee leaving the company before their age of retirement.
The employee’s pension entitlement from the company then takes the shape of a locked-in RRSP.
If the employee is unable to access this money, the LIT or Licensed Insolvency Trustee is obviously without any means of accessing it either.
Laws have been proposed to exempt most, if not all RRSPs in bankruptcy repayment.
However, it is best for you to consult legal aid in your locality of residence and verify which RRSPs offer necessary protection before investing into an RRSP in bankruptcy.
That way, you will know for sure whether you can bank on this money after you’ve been released from bankruptcy or if you will have to give up claim to this money during your bankruptcy process.
Don’t Spend Money from Your RRSP to Repay Your Debts
RRSPs are savings accounts which stay protected even during bankruptcy.
So it is a wise idea to let your money grow in them, so you can use this money after you have been released from bankruptcy and are looking towards a retired life.
Spending money from your RRSP to repay existing debt will only drain your retirement funds and delay the inevitable.