A survey conducted by BMO in June titled “Canadian Summer Spending Rises” found that 48 percent of respondents admitted they were likely to overspend during the summer. BNN Bloomberg.

As the carefree days of summer come to an end, many Canadians may be faced with bills and considering turning to their Registered Retirement Savings Plans (RRSPs) to help manage their debt.

However, early RRSP withdrawals can have significant tax consequences, and there may be better alternatives for raising the necessary funds.

For full-time workers, cashing out an RRSP can be a costly mistake from a tax perspective. RRSPs are designed so that contributions grow tax-free until they are withdrawn in retirement, ideally at a lower marginal tax rate.

Contributions made during higher income years can result in significant tax savings because they are taxed at a lower rate when withdrawn in retirement.

However, early withdrawals not only reduce the potential for long-term investment growth, but can also result in a higher tax rate if your income matches the time of the contribution.

The amount withdrawn is added to that year’s income, potentially resulting in a higher tax rate than the original savings.

In addition, any RRSP withdrawal by plan holders under age 65 is subject to immediate withholding taxes, which can be as high as 30 percent for withdrawals over $15,000.

This withholding tax can lead to an even higher tax burden if your marginal tax rate increases above 30 percent as a result of the withdrawal.

In addition, if an early RRSP withdrawal occurs, the allowable contribution margin is permanently lost, limiting future tax-saving opportunities.

If you’ve experienced a loss of income, an early withdrawal of your RRSP account may be easier to manage because the final tax bill will be lower due to the reduced marginal tax rate. While you’ll still have to pay withholding taxes, the withdrawal may be able to provide you with the funds you need to pay off your summer debt.

In addition, taxes can be avoided entirely if the funds are used to purchase a first home or for education, provided the money is repaid within the specified period.

A better way to get cash quickly to pay off debt might be a withdrawal from a tax-free savings account (TFSA). TFSAs are designed for short-term savings, and while deposits can’t be deducted from income, withdrawals and any earnings earned are never taxed.

It’s important to keep an eye on contribution limits, but a TFSA offers flexibility and tax-free access to funds when needed.

Those who delay paying off their summer debt and only pay the minimum amount on credit cards can expect interest rates of up to 30 percent. Borrowing through consumer lines of credit can also result in high interest costs, especially given recent interest rate hikes.

One possible solution for homeowners is to use a home equity line of credit (HELOC) to pay off high-interest debt. HELOCs generally offer lower interest rates, around seven percent, because they are secured by the equity in your home.

However, it is important to consider long-term borrowing costs, as interest rates may increase over time.

Online debt calculators can help you understand the true cost of borrowing and make informed decisions about how to manage your debt.