Some taxpayers hesitate between contributing to their MMTYs or paying their credit cards. Others are rather considering cashing in their MMTYs to pay off their debts. Is this a good solution? In the majority of cases, the answer is no. The short and long term consequences of this strategy are numerous.
The consequences of cashing in an MMTY to pay off debts
1. Withholding tax
When you invested in your MMTY, you recovered the tax paid on this amount. If you buy it back, the financial institution will retain an amount of money to pay it to the taxman. For example, if you withdraw $ 10,000 from your MMTY, 25% of this amount will be withheld at source. You will therefore only receive $ 7,500.
2. Withdrawal costs
Many financial institutions charge transaction fees for early withdrawals. You may also have to pay a penalty representing a percentage of the amount withdrawn.
3. Impossible to liquidate certain investments
Some investments do not allow withdrawal from an MMTY to pay off debts. Among other things, this is the case for the FTQ’s solidarity fund. This allows the collection of an MMTY ” only if it is a debt that causes an interruption of an essential service or if you are subject to a seizure of essential property. “
4. Increase in your taxable income
The amounts withdrawn from your MMTY will be added to your annual income. This increase in income could raise your tax rate. It could also decrease the amounts received under certain tax measures such as the Canada child benefit or the GST credit.
5. Loss of your contribution room
Unlike a TFSA, you do not get back your contribution room after buying an MMTY. You will therefore not be able to reinvest these sums later. You will have to settle for your new accumulated rights.
6. Loss of your yield
The advantage of investing early in an MMTY is to take advantage of compound interest. For example, a sum of $ 10,000 left in your MMTY for 25 years at a rate of return of 5% will have a value of $ 34,813. Planning to reinvest $ 10,000 after paying off your debts? If you only have 10 years left to grow it, its value will only be $ 16,470.
Impact on your retirement income
If you withdraw your MMTYs today, you are reducing the income available for retirement. If you are self-employed or do not have a pension fund, your financial security will be compromised.
What to do before cashing your MMTYs?
Many solutions exist to solve a debt problem. You can increase your income, sell assets, consolidate your debts, or even make a consumer offer. Do not hesitate to consult in order to benefit from professional advice adapted to your situation.