Having a Registered Retirement Savings Plan (RRSP) is a great strategy for saving towards your retirement. But how do withdrawals work? What are the rules and how can you minimize taxes? Here’s what you need to know about RRSP withdrawals.
How does an RRSP withdrawal work?
Since RRSPs are tax-deferred, you get a tax deduction when you contribute but have to pay taxes on withdrawals. The financial institution with which you hold your RRSP will hold back a certain percentage of your money, called a withholding tax, for tax purposes. This money is then sent to the government via the financial institution.
Keep in mind, however, that you may still owe more taxes (or might qualify for a refund) at the end of the year, depending on your total income and what tax bracket you fall under.
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When should I withdraw money from my RRSP?
You can make a withdrawal from your RRSP at any time, so long as it’s not a locked-in RRSP (also called a locked-in retirement account, or LIRA, in some provinces). However, that doesn’t mean you should. Withdrawing from your RRSP before retirement should be a last resort (except for in a couple of cases which will be discussed more below).
The reason for this is twofold. First, you lose that contribution space (and subsequently, the compounding interest and/or investment income associated with it). Second, you’ll likely end up paying more in taxes.
You can retire and start withdrawing from your RRSP at any age. However, at the end of the calendar year in which you turn 71, you can no longer hold an RRSP account and need to either take out the money as a lump sum, purchase an annuity, or convert it into a Registered Retirement Income Fund (RRIF).
What are the tax rates on RRSP withdrawals?
As mentioned above, when you withdraw from your RRSP the financial institution will hold a certain percentage of the money for income tax purposes. This rate depends on the province in which you live as well as the amount you take out. Note that, despite having higher income tax rates than the rest of Canada, Quebec has the lowest rates on RRSP withdrawals.
Tax rates on RRSP withdrawals are as follows:
- Up to $5,000: 10% (5% in Quebec)
- From $5,001-$15,000: 20% (10% in Quebec)
- Over $15,000: 30% (15% in Quebec)
Non-residents of Canada with an RRSP will pay a flat withholding tax rate of 25%, no matter the amount.
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How to withdraw RRSP without paying tax
So, is there any way to make a withdrawal and not pay tax? Actually, yes. There are two ways to do this: through either the Home Buyer’s Plan or the Lifelong Learning Plan. Individuals that use either of these programs do not have to pay tax on the withdrawal, however, that money does need to be repaid into your RRSP within a certain period of time.
Home Buyer’s Plan
If you are a first-time home-buyer (or it’s been at least four years since you occupied a property owned by you or your spouse) you are eligible for the Home Buyer’s Plan (HBP). The HBP allows you to withdraw up to a maximum of $35,000 from your RRSP to be put towards your home. If you are buying the home with a partner, you can both take advantage of the HBP and withdraw a total of $70,000 to use as a down payment.
Under the HBP, you will not be taxed on your RRSP withdrawals. However, you do need to pay back that money within a 15-year period. Payments start the second calendar year after the withdrawal (so if you used the HBP in 2021, you start paying it back in 2022) and you must pay at least 1/15th of the total withdrawal amount each year back into your RRSP.
Lifelong Learning Plan
The second way to withdraw from your RRSP without having to pay tax is under the Lifelong Learning Plan (LLP). The LLP is used to help individuals pay for training or education. It can be for yourself, your partner or spouse, or both of you at the same time. However, it cannot be used for your children.
You can take out a maximum of $10,000 each calendar year to use for this plan up to a maximum of $20,000 total. To qualify, you must be a resident of Canada and you have to be a full-time student (students with disabilities can be registered part-time) and register with an admissible program in a recognized educational institution. You will not be taxed under the LLP, however, you do have to pay back the entire amount within 10 years.
Can I withdraw from my RRSP before retirement?
You can, as long as it’s not a locked-in RRSP account. Then you can withdraw funds from your RRSP at any time. However, remember that you will be taxed and you will lose that contribution room.
Is a withdrawal from my RRSP the same as shutting it down?
Only if you are withdrawing the entire amount. Keep in mind your account must be closed by the age of 71, but can be converted into a Registered Retirement Income Fund (RRIF).
Does a transfer count as a withdrawal?
No, not if you transfer from one RRSP to another. However, such transfers must be handled properly so speak to your financial provider before attempting to do it yourself.