Lisa MacColl is a writer, investor and former compliance consultant in the group retirement and individual wealth management fields. Lisa has written about personal finance for 14 years and currently writes about investing and investment providers for Wealthsimple. Lisa's past work has been published in Canadian Money Saver, Advisor’s Edge, CBC, and CreditCards.ca. She was a nominee for the 2015 Oktoberfest Women of the Year, Professional Category. Lisa holds an M.A. and B.A. from the Wilfrid Laurier University.
Registered Retirement Savings Plans (RRSPs) are a great way to save for retirement. However, there are tax consequences if you withdraw the funds before retirement. Here’s what you need to know.
Things to know before withdrawing your RRSP
When you withdraw money from your RRSP, you must declare the full amount as income in the year you withdraw, and that can result in a hefty tax bill.
Think carefully before withdrawing money from your RRSP to cover debts. You lose the power of compounding. Long-term contributions earn money on both the contribution and any investment earnings. It takes a long time to replace the funds. You must include the full amount of the RRSP withdrawal amount in your income at tax time. While some tax is withheld at the time of the withdrawal, (see What is RRSP Withholding Tax) it may not be enough to cover the full amount of income tax that will be owing. Try to withdraw the funds from a Tax-Free Savings Account or consult a financial professional and re-jig your budget to put more towards debt repayment.
You don’t get contribution room back. The Canada Revenue Agency (CRA) only lets you count that contribution once — you can't add back the amount of a withdrawal to existing contribution room.
You can request a “gross” or “net” withdrawal. A $1,500 gross withdrawal will deduct $1,500 from the RRSP, and the amount you receive will have taxes and administrative fees deducted. If you choose “net” withdrawal, you will receive a cheque for $1,500, but the actual withdrawal amount will be higher to cover withholding tax and any administrative fees.
Remember: You can name a beneficiary on an RRSP, and it can be “revocable” (you can change it any time) or “irrevocable” (you cannot change it without the named beneficiary’s permission.) If you named someone an irrevocable beneficiary, you cannot withdraw the funds without that beneficiary’s permission. If the beneficiary is unable to provide consent (e.g. a child who is younger than the provincial age of majority or a person with cognitive or mental impairments) you will not be able to withdraw the funds or change the designation. If you made the designation irrevocable in error, talk with your financial institution or legal advisor.
Taxes on RRSP Withdrawals
There are two types of tax you will need to consider if you make an RRSP withdrawal, withholding tax and your marginal tax rate.
What is RRSP withholding tax?
RRSP withholding tax is a tax that's withheld when you make a withdrawal from your RRSP. The money withheld by your financial institution is passed to the CRA. The rate of RRSP tax varies depending on the amount you withdraw and the province you live in. This tax is also called RRSP Withdrawal tax.
For British Columbia, Alberta, Saskatchewan, Ontario, New Brunswick, Nova Scotia, Nunavut, Newfoundland and Labrador, Prince Edward Island, Yukon and Northwest Territories the following tax rates apply:
|Amount of withdrawal||Tax Rate|
For Quebec, the following RRSP withholding tax rates apply:
|Amount of Withdrawal||Tax Rate|
Residents of Québec also pay provincial sales tax of 16% in addition to the federal withholding tax. If you are a non-resident of Canada, you will pay 25% tax withholding regardless of the size of the withdrawal. The withholding tax is generally not enough to cover all taxes owing on the withdrawal, depending on your other sources of income.
What is Marginal Tax Rate
Your marginal tax rate is the combined federal and provincial taxes you pay on income at tax time. Your financial institution will provide a T4-RRSP showing the amount of the withdrawal, and any tax withheld. You must declare this amount on your T1 General Income Tax Return in the calendar year you withdrew it.
Remember: RRSP withdrawal amounts are added to your gross earned income. Depending on the size of the withdrawal, it could push you into a higher tax bracket.
Federal Tax Rates
The tax rates for the current year can be found on the Canada Revenue Agency: website.
Provincial Tax Rates
In addition to federal tax, provincial tax must also be taken into account. Provincial tax much rates for the current year can be found on the Canada Revenue Agency: website.
Remember: Your marginal tax rate is the total of both federal and provincial income taxes on income.
Withdrawing RRSP At Retirement
You are permitted to contribute to an RRSP until December 31 of the calendar year you turn 71. You may contribute to a spousal RRSP until December 31 of the calendar year your spouse turns 71.
At the end of the calendar year you/your spouse turn 71, the RRSP must be collapsed. At this point, you can:
Take the full amount as a lump sum withdrawal, subject to withholding tax. The full amount must be added to your income and would be subject to your combined marginal tax rate. That could result in a very large tax bill.
Convert the RRSP to a Registered Retirement Income Fund (RRIF) and start drawing payments from it. CRA sets a minimum amount that must be withdrawn. It is based on age and is a percentage of the market value of the RRIF.
The RRSP withdrawal age is 71 years. You are not allowed to own an RRSP past December 31 of the calendar year you turn the age of 71. The funds must be withdrawn, or the account converted to an RRIF.
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RRSP Withdrawal Rules
We mentioned this rule before, but it's an important one, that's worth repeating. Withdrawal from an RRSP must be included as income and is subject to income tax at your combined marginal tax rate. Funds withdrawn under the Homebuyers’ Plan or the Lifelong Learning Plan are not considered income, do not have withholding tax deducted but must be paid back over a set period of time.
You can transfer funds from an RRSP in one financial institution to another as long as the funds remain in an RRSP. If your financial institution charges transfer fees, it might be time to switch to an investment provider with no transfer fees. Transfers to or from a spouse due to relationship breakdown, or due to the death of a spouse are not considered withdrawals and are not subject to income tax as long as they are transferred directly from one RRSP to another. Ask your financial institution for assistance.
Homebuyers’ Plan (HBP)
If you meet the eligibility criteria, CRA allows you to withdraw up to $25,000 tax-free to put towards the purchase of a new home. You have 15 years to pay the funds back and repayments start the second year after you withdraw the funds. CRA will send you a statement each year with your HBP balance owing, payments made to date, and what the minimum payment amount is.
Lifelong Learning Plan (LLP) If you meet the eligibility criteria, CRA allows you to withdraw up to $10,000 tax-free per calendar year, subject to a maximum combined total of $20,000 tax-free to finance full-time education or training for you or your spouse. You cannot withdraw funds to pay for your children’s education under this plan.
You can spread the eligible withdrawals over 4 years. The accumulated total cannot exceed $20,000. You have 10 years to pay back the LLP loan, starting in the fifth year after your first LLP withdrawal. CRA will send you an LLP notice each year with your LLP balance, payments made, and the amount of your next LLP payment. You must file income tax each year and designate your LLP repayment on Schedule 7. The CRA go into more detail on LLP here.
Spousal RRSP Withdrawal Rules
Spousal RRSPs have some specific rules about withdrawals. Fred and Ginger have a spousal RRSP. Fred (the contributor) makes the contributions and receives the tax deduction; Ginger (the annuitant) owns the account and will receive the income from it at retirement. Ginger will be taxed on the income.
Attribution rule: The spousal attribution rule is designed to prevent the use of a spousal contribution for tax avoidance. If funds are withdrawn within 3 years of the contribution being made, the contributor, rather than the annuitant will be taxed.
If Fred contributes to Ginger’s RRSP, and then Ginger withdraws the money within a year later, Fred will have to pay tax on the withdrawal amount.
Spousal RRIF: A spousal RRSP converts to a spousal RRIF at age 71. If Ginger withdraws only the minimum required RRIF amount, Ginger will pay the tax. However, if Ginger withdraws more than the minimum amount, Fred will be taxed on the excess amount.
RRSP Withdrawals at age 55+
You can convert your RRSP to an RRIF starting at age 55 and begin receiving payments. Once you convert the RRSP to an RRIF, you cannot change your mind later and turn it back into an RRSP. The biggest danger with early conversion to RRIF is you could run out of funds before you die. Always talk to a financial professional to ensure you understand all your options.
RRSP Withholding Tax On Multiple Withdrawals
If you withdraw multiple smaller amounts in a short period of time to avoid the higher withholding tax, your financial institution could still deduct the amount of withholding tax that would apply on the total amount. For example, if you want to withdraw $8000 but you split it into 4 monthly withdrawals of $2000 to avoid the 20% tax withholding, your financial institution could still withhold 20% on the last withdrawal if they notice the pattern.
Locked-in RRSP withdrawal
If you transfer pension funds to an RRSP, the funds may need to be “locked-in” until retirement. The funds follow pension locking-in rules and it varies by province. You cannot withdraw funds from a locked-in RRSP until the specified retirement age.
You can unlock funds in special circumstances such as financial hardship (not all provinces allow this), shortened life expectancy or you can request small balances to be unlocked at age 55. See a financial advisor for more information.
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