Should I use retirement savings to pay off credit card debt?

Comparing interest rates for debt vs. savings

Interest rates on credit card balances are some of the highest out there, so it’s understandable to want to pay off that debt as soon as possible. Using retirement savings like a smart solution, but it’s important to know what you’d be giving up.

“We often see retirees feeling pressured to solve a short-term debt issue by creating a long-term cash-flow problem” says Bruce Sellery, CEO at Credit Canada and the author of Moolala Guide to Rockin’ Your RRSP (Figure 1 Publishing, 2018). “It’s important to step back and look at the full picture.”

Taking money out of your registered retirement savings plan (RRSP) and/or RRIF means you’ll pay income tax on that amount and it can reduce your income in retirement. It could also change the amount of government benefits you could receive, like the Guaranteed Income Supplement (GIS) or Old Age Security (OAS), which are based on your income.

This decisions can have a lasting impact on your retirement savings, so it’s worth taking the time to carefully weigh the long-term implications before dipping into your savings.

How registered account (and pension) withdrawals work

When it comes to using retirement savings to pay off credit-card debt, not all retirement accounts work the same way. Here’s a breakdown, but always check with your advisor

RRIF: This registered account requires you to take out a minimum amount each year, but every dollar you withdraw is fully taxable. So, if you’re thinking about taking out more than the minimum amount to pay off any debt, keep in mind that it will be added to your annual income, which can affect income-tested government benefits like the GIS and OAS. For example, if your income exceeds $143,000, OAS will be clawed back and if your income is above $87,734, you will need to repay a portion of your OAS.

RRSP: Withdrawing from an RRSP also means paying tax on the amount you take out. The amount you withdraw will be added to your yearly income, which could push you into a higher tax bracket. This means you’ll pay more in taxes. Plus, once the money is taken out, it stops growing—so you miss out on any future gains from interest or investments.

TFSA: Tax-free savings accounts (TFSAs) are the most flexible when it comes to withdrawals. You won’t pay any tax on the money you take out and it won’t affect your eligibility for government benefits. However, using your TFSA for debt repayment means you’re using up a tax-friendly savings space that could be hard to rebuild, especially on a fixed income.

LIRAs and pensions: Locked-in retirement accounts (LIRAs) and pensions are typically more difficult to access, and they’re designed to provide steady income throughout retirement. Using these funds to pay off debt involves strict rules, paperwork, and sometimes penalties, making them a less practical option for covering short-term needs.

Using a loan to pay off debt

If you’re thinking about ways to tackle your credit-card debt without dipping into your retirement savings, a loan or line of credit from a bank might be a good alternative. These options usually come with lower interest rates (6% and up) than credit cards (19.99% to 23.99%, which can help you pay down the balance faster and save money on interest. You can also shop around for low-rate credit cards offering promotional interest rates you may be eligible for. 

However, it’s important to keep in mind that any loan means added monthly payments—and if you’re on a fixed income, that may be tough to manage. Be especially cautious with private lenders, as they often charge higher interest rates and come with riskier terms. While a loan might help in some cases, it’s not always the right fit, especially if repayment would put too much strain on your budget. “When someone is on a fixed income, every dollar matters. The right strategy can help preserve your savings and reduce debt,” says Sellery.

The importance of budgeting

Getting serious about budgeting can help free up a cash surplus to pay off your credit-card debt and avoid using your retirement savings. Start by creating a realistic budget that helps you keep track of your income and expenses. This will give you a clear picture of your spending habits and where you might be able to cut back. Those savings can then be directed to your debt payments, utilizing either the avalanche or snowball method. Using budgeting tools, including MoneySense’s free Excel budget template, Credit Canada’s free Budget Planner + Expense Tracker, or apps like Butterfly, can provide insights into your spending patterns and ensure accountability to help you reach your financial goals.