How I lost $9000
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As a teenager, my dream job was to be a lawyer and dabble in international criminal law. So when the opportunity came to study in Canada, I jumped at it. Unfortunately, after a few years in Canada, my parents' business suffered, and I could not afford my bachelor's degree and Juris Doctor education as an international student. So I decided to graduate with my bachelor's, go right into the working world (at that time, employment was still pretty straightforward), save money, get my permanent residency (PR) and then go to law school. I was lucky to get a stable job at MacEwan University. Once settled, I found a financial advisor and mapped my finances, savings and investments toward my future education. My workplace also had a pension, so I contributed towards that.
Five years later, I was now a PR and had saved up money to continue my post-secondary education. School at this time meant my master's as I had changed my mind from law to international affairs. My pension from my workplace had accrued quite a decent amount. Since I worked there for over two years, the money was moved to a Locked-in Retirement Account (LIRA). In a LIRA, the funds are locked in and can't be accessed even for housing or education except under extenuating circumstances.
Now, this was where I made my first fundamental mistake. I wanted to use the funds for my living expenses as a full-time student since it was a significant sum, and I knew some ways to unlock the money. Without consulting with my financial advisor, I applied to my province (Alberta) to unlock over 20 thousand dollars in the account since I had a low income then. The application was approved, but it came at a high cost. Canada Revenue Agency (CRA) taxed my withdrawal at 30 percent, so they took over $9000 from me. It turns out the same rules for Registered Retirement Savings Plans (RRSP) apply to LIRAs. Plus, the amount I withdrew was part of my contribution room for my RRSP, which I cannot get back.
This incident happened four years ago, but today, when I think about how much I lost to the government, it still pains me. I should have researched further and asked my financial advisor for the best way and time to unlock that money. I should have taken out student loans because I would have paid less interest. I should have accessed my Life-long Learning Plan (LLP) from my RRSP. The process was such an unnecessary waste of money.
But this can serve as a lesson to you. Ensure you put enough into your emergency savings and Tax-Free Savings Account (TFSA) before contributing to RRSPs. Even with the LLP, there are still limits on how much you can take out, especially if you are also looking to fund your living expenses. If you withdraw from your RRSP or LIRA (when unlocked) before retirement, you will be taxed:
10 % from 1-5,000 dollars
20 % from 5,000-15,000 dollars
30% from more than 15,000 a dollar
A financial advisor consultation will help you save tons and avoid unnecessary taxation.