I have a choice... roll into RRSP or cash it out now.

[GoStumpy]

I recently (today officailly) resigned from my employer. I will be starting late January with a new employer, starting wage will be similar, with a raise of $4/h after 3 months.

I've been off on medical EI for the past 4 months, so our income has been down from normal. Wife is making decent $ as of late, so that has been a huge help.

We've trimmed spending a lot, but she is 4 months pregnant and needing some new comfortable clothing, so she's spending some $ on that, we lost my work truck to commute in, so we've been spending ~$500/mo on gas for her going to & from work... We're pretty much even each month without any savings whatsoever.

I am getting $6200 from my previous employer in the form of a DPSP (deferred profit sharing plan) and have the option to either roll it into an RRSP tax free, or cash it out and pay tax. My tax rate is ~24%, so we'd have approx $4700 left after taxes.

That is pretty much our monthly income when both of us are working.

I am at a crossroads here... I could cash it out and instantly have a 1 month buffer, no longer stress about paycheques & bills lining up, and be able to actually plan out our month's spending with the $ in hand, pay all bills on the 1st, etc. I am a YNAB user, so I track every bit of spending we do (except cash). With YNAB I would be able to allot the $ to all of the different categories and have an actual budget to check on and use. Right now we're using it post-partum, looking back on what we spent.

This would include a monthly savings towards retirement, a minimum $ value I haven't decided, but there would be monthly amounts going to retirement.

OR

Roll it into an RRSP and use the money to jumpstart my retirement savings... I doubt I would be able to start actually saving for retirement until after the baby is born, until then we are kind of just paying the minimums and trying to get out of overdraft.....

Thoughts???

[xlxo]

Some thoughts...

• 24% is not high, but not low. You will still see some benefits of an RRSP.
• If you can't decide.... you can always put half of part of it in an RRSP and put the money aside as an emergency comes up in 2014. If there's excess, throw it in an RRSP next year.
• Was 2013 your family's big income year? You want put the RRSP before February this year to reduce your 2013 income.
• What ever money you put in February, reduces your income and you get a nice return a few months later.
• Money that goes into an RRSP today can be used for a downpayment on home in the near future.
• $500 monthly gas? Don't forget gas prices are low in winter, but peak in May. Expect that be higher in the coming weeks. Perhaps it's time to think about getting a smaller, more fuel efficient vehicle.
• and then there's RESP for the kid's and TFSA's....
  http://www.cbc.ca/player/Shows/Shows...344406/?page=5

[GoStumpy]

Thanks for the quick response
- 2013 was definitely not a big income year, actually quite low IMHO, since I was off work on EI for 4 months, my personal income will be lower than normal.
- Since this is a DPSP, there was no tax on it, and I don't think it will count towards my RRSP limit? And I don't think I'll get a return from it?
- We are in a pickle with the vehicle, having a loan with the vehicle lein means I need to get the bank involved if the buyer needs to get financing... We're going to look at a few ~$1000 cars this weekend to see if maybe we can just pick up a cheap car to drive while I try to sell the SUV.

[blueeyetea]

Is there enough taxes taken off your EI?

You could also roll the cash into an RRSP savings account (no term) and consider that money as your emergency fund and use it only when you really need it. If it happens that you don't use it, say in a year or two, you can convert into a longer term investment.

[lizzie bargain]

It does sound like you need an emergency fund, especially with a baby coming, but maybe blue eye teas idea is good-best of both worlds. By putting it in in the first 60 days of this year you can can count it as a deduction for either 2013 or 2014 and it is sounding like 2014 will be a higher income year for you so more benefit to you. Also consider whether if you do an RRSP it is better to do in your name or a spousal-who do you think will have the lower income when you retire or even in the early child rearing years-it has to be in for 3 years before your wife can take it out in her name but perhaps in 3 years she will be having another child and use it to supplement her EI benefits for eg. I definitely used RRSP withdrawals to supplement EI when I was on mat leave-gives you that option down the road for another child or if she is working part-time. Not sure what you mean when you say I don't think I will get a return on the DPSP.

[Frugalbigmama]

You need an emergency fund and if it will help you budget better for the future I say take the money out. You said it will help you plan a monthly savings amount starting now too right? Sounds like it will really help your family plan now (who knows what your situation will be down the road, will that little money sitting in RRSP help? I doubt it)

[GoStumpy]

Well, found out that the payout wouldn't be until sometime in March, when they do their shares selloff or something... so it doesn't look like the money will help me in the short-term

[sarah_cio]

I had a similar situation and at income tax time I had to pay additional tax on top of what I had already paid. It is something to think about. I would definitely recommend an RRSP in my experience over cashing it out.

[xlxo]

Thanks for the quick response
- We are in a pickle with the vehicle, having a loan with the vehicle lein means I need to get the bank involved if the buyer needs to get financing... We're going to look at a few ~$1000 cars this weekend to see if maybe we can just pick up a cheap car to drive while I try to sell the SUV.

Hope you know what you are doing.... I can understand why you want a SUV in the Interior climate. $1000 may not be the most reliable and have you paying for repairs.

[xlxo]

You could also roll the cash into an RRSP savings account (no term) and consider that money as your emergency fund and use it only when you really need it. If it happens that you don't use it, say in a year or two, you can convert into a longer term investment.

Pay attention to penalties if you take money out of an RRSP. Unlike a savings account, there are very high administrative fees if an RRSP contains mutual funds and stocks. That is why I suggest putting part in RRSP and another part in basic savings if he is indecisive.... wanting to use it for emergency purposes.

[GoStumpy]

I decided to take $3500 in cash and the rest into RRSP. I'll keep the cash around, and if I change my mind I think I'll be able to put it into RRSP's before the year is over... I'll talk to my tax advisor once more to make sure that's possible

Picked up a 2000 Toyota Corolla yesterday, needs a few things, but damn was it a good deal for $1500 Needs the radio antenna hooked up, front shocks, 2 more winter tires, and a water pump... me and a friend flip cars for extra money so we know what we are doing and have quite a few good connections in the industry to fix things for cheap REALLY looking forward to driving that thing for a while and watching the gas guage never move ;-)

That alone will save us ~$250/mo in gas, and lower insurance as well. I'm selling our SUV in the meantime, and once it's sold, we'll buy a fuel efficient car worth $5000 or so. Then I can sell this Corolla for what we paid or more

Since this is a DPSP in my name and not in an RRSP, I'm positive there are no penalties for cashing it out, just taxes.

[Shwa Girl]

I decided to take $3500 in cash and the rest into RRSP. I'll keep the cash around, and if I change my mind I think I'll be able to put it into RRSP's before the year is over... I'll talk to my tax advisor once more to make sure that's possible

I think that both President's Choice Financial and ING Direct are offering 2.5% interest on select savings accounts. This may be good for the cash portion you are saving and/or the RRSP portion.

For the cash, you may want to consider a Tax Free Savings Account to store it.

[brunt]

I think that the better idea would be do dump it into a TFSA rather than an RRSP.

Sure, you don't get the tax deduction, but here is where RRSP's are widely misunderstood. RRSP's do not save income tax, they delay income tax. Keep saying that to yourself until you get any contrary notions out of your head.

Contributions to RRSP's primary help if you are currently in a high tax rate, and expect to be in a lower one later when you make withdrawals. You are currently at 24%, which is pretty low. I would not expect much lower later.

If you crunch all of the numbers, TFSA pretty well has the same benefit as an RRSP, but with one biggie difference. If you find yourself temporarily short of money, you can take money out of a TFSA and replace it next year. Take it out of an RRSP, and you cannot replace it. This alone is reason to consider the TFSA seriously.

My stand is that RRSP contributions should only be considered if your employer is making a matching contribution (not your case), or if you expect your tax rate to be considerably lower in the relatively near future (say under 10 years), in which case you can contribute now, and effectively move some of your current income into a lower tax year.

[FLA]

I think that both President's Choice Financial and ING Direct are offering 2.5% interest on select savings accounts. This may be good for the cash portion you are saving and/or the RRSP portion.

For the cash, you may want to consider a Tax Free Savings Account to store it.

2.5% is very good.