Is your RRSP safe from creditors?

In a word, No.

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.

Everyday 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 Counselling 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 paralysed. 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.

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