Is your RRSP safe from creditors?
In a word, No
This article was written by Michael Kane and reproduced from The
Vancouver Sun June 16, 2000.
Is
your RRSP safe from creditors? After reports this week that officials tried to
grab a Toronto man's retirement savings to pay a disputed tax bill, you might
have reason to be concerned. Every day
registered retirement savings plans are considered to be savings accounts that
can be drawn down at any time - by you or those who can prove you owe them
money. The same goes for pensioners
with their life savings in registered retirement income funds.
"As
a rule of thumb, if a person has access to their retirement savings, so do
their creditors," says Scott Hannah, executive-director of the Credit
Counseling Society of B.C. "While
there is provision for debtors to keep some home equity, a car and some
personal possessions, there is no such protection for RRSPs."
A
creditor would have to go through due process to get at your RRSP or RRIF, but
ultimately it is up for grabs, unlike registered pension plans and retirement
products governed by provincial pensions and insurance legislation.
If
you are not worried because you always pay your bills, consider the cautions
offered by money writer Bruce Cohen in his book, The Money Adviser:
·
Rushing
through traffic, you hit a brain surgeon who is left paralyzed. She wins a
judgment that exceeds your insurance.
·
Your
business fails. The bank goes after your assets for a loan you took out. Yes,
you're incorporated, but the loan was personally guaranteed.
·
A
tax audit finds you have been cheating for 20 years. There's no time limit on
tax evasion. You get a gargantuan bill for back tax, penalties and interest You
spend a fortune in legal fees to appeal, but lose.
Any of these scenarios could place your
retirement fund in jeopardy. Creditors
might reasonably argue that if your RRSP is the only cash available, they
should be entitled to it. In contrast, if you
belong to a registered pension plan, your money is beyond the reach of
creditors, except for spousal claims on marital breakdown. The law intends
pension money to be used to provide a pension.
Similarly if you have pension credits in a locked-in RRSP, also known as
a locked-in retirement account, or LIRA, the money is protected by the
legislation which governed the original pension plan.
And if your RRSP is with a life insurance company, it is creditor-proof, provided there is a named beneficiary and the contributor does not go bankrupt within one year of placing the money - or within five years if creditors show the money was needed to pay debts at the time of the contribution. Creditor-proofing is one reason for the surging popularity of segregated funds - mutual funds that come with an insurance wrapper that guarantees your capital after 10 years. Although more than 50 per cent of small business entrepreneurs have borrowed funds to finance a business, the majority have failed to protect their personal assets from creditors in the event of a lawsuit or bankruptcy according to a national survey for Trimark Investment Management.
The 1999 study found 53
per cent of small business entrepreneurs have given personal guarantees to
secure loans. Forty per cent have used
their own homes as collateral, and 20 per cent have put their investments and
retirement savings on the line. In most
cases, if a business owner makes a deposit to a segregated fund and names a
direct family member as beneficiary, the funds cannot be seized in a claim
against his or her business or personal assets. Just be aware that you pay for the insurance company's protection
through higher yearly management fees that could significantly reduce the size
of your ultimate nest egg.
