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Making RRSP Withdrawals: What You Should Know
Jan 05, 2024
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Key takeaways
- You may take money out of your RRSP any time, but you’ll pay tax if you do.
- You have options to withdraw money from your RRSP for your retirement.
- Withdrawing from your RRSP before maturity incurs withholding and income taxes, forfeits tax-deferred compounding, and permanently reduces your contribution room.
When you can withdraw money from your RRSP
As long as your RRSP isn’t a locked-in plan, you can take money out of your RRSP any time. The withdrawal, however, is subject to withholding tax and the amount also needs to be included as income when filing your taxes. You’ll also lose the contribution room you originally used to make your RRSP contribution.
For these reasons, and the fact you may be losing out on positive effect of compounding on your investment returns, taking money out of your RRSP before retirement can really impact your savings. It’s best to consult with your advisor before doing so.
Withdrawing RRSP money at retirement
You can keep contributing to your RRSP until Dec. 31 of year you turn 71. At the end of that year, you have 3 options to withdraw the money to use for your retirement:
1. Convert your RRSP to a RRIF
You can convert your RRSP to a registered retirement income fund (RRIF) at any age. However, once your convert it, you can’t change it back to an RRSP. Once you convert to a RRIF, you can start receiving payments from it.
The CRA sets the minimum amount you must withdraw based on your age and a percentage of the market value of the RRIF. All money withdrawn from a registered account is fully taxable in the year you withdrawn it. You’ll pay no withholding tax on the minimum amount you receive from your RRIF. You will pay withholding tax on RRIF amounts you receive over the minimum.
2. Purchase an annuity
You can convert your RRSP to an annuity which can provide you with guaranteed income for a specific period of time or the rest of your life. You won’t pay withholding tax and the money you receive from the annuity is full taxable in the year you receive it.
3. Lump sum withdrawal
You can withdraw all the money from your RRSP. You’ll pay withholding taxes and the full amount will be included in your income which could result in you paying a large amount of tax.
Withdrawing from an RRSP Before Maturity
Understanding the tax implications of withdrawing from your RRSP before maturity can help you decide if and when you should. If you make an early RRSP withdrawal:
- You pay a withholding tax: The withholding tax varies depending on the amount withdrawn and your province of residence.
- You pay income tax: Your withdrawals must be reported on your tax return as income. If your current income is higher than your retirement income, you’ll pay more taxes now.
- You lose out on tax-deferred compounding: Because RRSP contributions can compound over time, even a small withdrawal made today can have a big impact on your savings later.
- You lose your contribution room: When you withdraw funds from an RRSP, you permanently lose the contribution room you originally used to make your contribution.
The RRSP withholding tax
This tax is withheld by your financial institutions when you take money out of your RRSP and passed to the CRA. The rate depends on how much you withdraw and the province where you live.
Withdrawing money from your RRSP without paying taxes
Home Buyers’ Plan (HBP)
If you meet the Canada Revenue Agency’s (CRA) eligibility rules, you can withdraw up to $35,000 to pay for your first home. You must re-contrbute the money to your RRSP starting 2 years after you withdraw it, and you have 15 years to pay it all back, or include the amounts in your income. The CRA will send you an annual statement with your balance, payments made and the minimum payments for the next year.
Lifelong Learning Plan (LLP)
To help pay for full-time education or training for you or your spouse or common-law partner, you may withdraw up to $10,000 per year to a lifetime maximum of $20,000 if you meet the criteria. You have 5 years to begin re-contribute the money back to your RRSP, and 10 years to pay it all back, otherwise it will be included in your income.
The CRA will send you an annual statement with your balance, payments made and the minimum payments for the next year.
What can you put in an RRSP?
Don’t let the term ‘savings’ plan limit you. Ai Financial offers this investment opportunity:
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