Should I keep my emergency fund inside or outside my RRSP?

Warren Baldwin, vice-president of T.E. Financial Consultants, has the answer.

Warren Baldwin 8 February, 2005 | 2:00PM
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Dear Expert,

Does it make more sense to build my emergency fund inside my RRSP or outside of it? In my case I'm 29 and am looking at approximately six months of net income for my emergency fund.

Expert Answer:

I would not recommend using an RRSP for "emergency" funds, ever. The taxation of any emergency cash withdrawn is just too awkward a problem. Rather, I would recommend making reasonable contributions to an RRSP and using some small cash outside just to manage cash flow issues. You should also apply for a line of credit to provide "emergency" access to larger sums of cash. This way, you are not short-changing your RRSP funds and you do not have a lot of cash sitting idle in low-interest deposits. The line of credit costs you nothing if it is not used, and presumably the rate is reasonable if you do use it. You can use as little or as much of the line of credit as you need and repay it at any time.

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Warren Baldwin

Warren Baldwin  

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