Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.
Paying into a Registered Retirement Savings Plan (RRSP) allows Canadians to save for retirement by putting their money into a wide variety of investments—such as mutual funds, ETFs, and stocks—and offers some important tax benefits. While the investments stay in the RRSP, you don’t pay income tax on any interest, dividends, or capital gains you earn. Plus, the money that you regularly contribute to an RRSP is considered “pre-tax,” meaning that you can subtract the amount you contribute from your income and pay less in income taxes.Our RRSPs use a Nobel Prize winning investing strategy at a fraction of the fees charged by big banks. Plus it takes just a few minutes to get started. Let’s go!
The RRSP withholding tax rate
For example: Say you’re 45 and nowhere near retirement, and the roof of your house collapses. You need money, asap. So you decide to withdraw early from your RRSP. Well, that’ll come at a cost. When you withdraw from your RRSP before retirement, you’ll be charged what’s known as a withholding tax, which will be withdrawn from your account directly by the financial institution where you have your RRSP. That amount then goes to the government.
RRSP withholding tax is charged when you withdraw funds from your RRSP before retirement. The current rate of RRSP withholding tax is 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000.
The tax rate depends on how much you withdraw and where you reside. If you are a resident of Canada, the withholding rates are as follows (as of publication):
10% (5% in Quebec) on amounts up to $5,000
20% (10% in Quebec) on amounts over $5,000 up to including $15,000
30% (15% in Quebec) on amounts over $15,000
(Residents of Québec also pay a provincial sales tax of 15% in addition to the federal withholding tax. If you are a non-resident of Canada, you will pay a 25% withholding tax rate, regardless of the size of the withdrawal.
It’s also important to keep in mind that this won’t be the only time you’ll be taxed: The amount you withdraw will count as income, so you’ll have to declare it once you do your tax declaration for the year that you’ve withdrawn. If the withdrawal ends up putting you in a higher tax bracket, you’ll have to pay more income tax, since the withdrawal tax likely won’t cover the full amount of income tax you’ll owe. That’s why withdrawing prematurely from an RRSP should really be a last resort, after you’ve exhausted all other possible avenues.
When you withdraw from your RRSP, your financial institution will provide a T4RSP showing the amount you withdrew, and how much tax was withheld. You must declare this amount on your T1 General Income Tax Return in the calendar year you withdrew it. You can find the income tax rates for the current year on the Canada Revenue Agency (CRA) website.
Another important consideration: You don’t get your contribution room back. The Canada Revenue Agency only lets you count that contribution once—you can’t add back the amount of a withdrawal to existing contribution room. So if you take out $7,000, you won’t be able to add it back in later. That means you’ll decrease the amount of money in the account that would benefit from compounding.
How to avoid withholding tax when withdrawing RRSP funds
There are actually two exceptions where early withdrawals from an RRSP won’t incur withholding taxes. These are withdrawals made under the Home Buyers’ Plan (HBP) and/or the Lifelong Learning Plan (LLP).
The Home Buyers’ Plan is a program that allows you to withdraw up to $35,000 (tax-free) in a calendar year from your RRSP in order to buy or build a 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. In order to participate in this program, you’ll have to fulfill certain criteria, including demonstrating that you’re a first-time home buyer.
Participants in the Lifelong Learning Plan are allowed to withdraw up to $10,000 tax-free per calendar year from an RRSP, subject to a maximum combined total of $20,000 tax-free to finance full-time education or training for you, your spouse, or your common-law partner. You don’t have to withdraw the full amount at once, and can instead spread it out over four years, as long as you don’t exceed $20,000.
You have 10 years to pay back the funds. Starting year of repayment will depend on how long you remain a qualifying student after the 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 still have to file income tax each year and designate your LLP repayment on Schedule 7.
Consequences of withdrawing RRSP money early
The biggest consequence of prematurely withdrawing RRSP funds early is certainly the tax penalties. Your tax bill can really suffer, especially if you withdraw a large amount, since in addition to the withdrawal taxes you’ll also be paying combined income tax.
But another huge consequence of withdrawing funds early? The simple truth is that you’re just robbing your future self of money you’ll need in retirement. An RRSP works its magic when longterm, steady contributions allow funds to grow thanks to the magic of compounding. Withdrawing funds is a huge setback for the progress of your retirement fund, especially since you won’t be able to recuperate the contribution room you’ve lost through early withdrawal.
Keep in mind that withdrawing multiple smaller amounts in a short period of time in an attempt to avoid the higher withholding tax comes with certain disadvantages as well. Your financial institution could still deduct the amount of withholding tax that would apply to the total amount. For example, if you want to withdraw $10,000 but you split it into four monthly withdrawals of $2,500 to avoid the 20% tax withholding rate, your financial institution could still withhold 20% on the last withdrawal if they notice the pattern. The point is: Withdrawals are generally not advisable and you should be exploring other possible avenues before you touch your RRSP.
Frequently Asked Questions
How much tax you pay on a withdrawal depends on the amount of withdrawal and your location. All Canadians living outside Quebec pay 10% on amounts up to $5,000, 20% on amounts between $5,000 and $15,000, and 30% on any amount above $15,000.
Residents of Quebec pay 5% on amounts up to $5,000, 10% on amounts between $5,000 and $15,000, and 15% on amounts above $15,000. There is also a 15% provincial tax on withdrawals in Quebec. Non-residents pay tax at 25% on each withdrawal regardless of the amount withdrawn.
The financial company that administers your RRSP withholds your RRSP taxes when you make early RRSP withdrawals. To calculate your taxes, you need to find how much you are withdrawing and then calculate the taxes accordingly. The tax rate for all Canadians except residents of Quebec is:
10% on the amount up to $5,000
20% on amount above $5,000 up to $15,000
30% on amount over $15,000
The federal withholding tax rates for 2021 are:
15% on $49,020 or less
20.5% on income above $49,020 up to $98,040
26% on income above $98,040 up to $151,978
29% on income above $151,978 up to $216,511
33% on income more than $216,511
The federal withholding tax rates for 2022 are:
15% on $50,197 or less
20.5% on income above $50,195 up to $100,392
26% on income above $55,233 up to $155,625
29% on income above $66,083 up to $221,708
33% on income over $221,708
Yes, RRSP withdrawals are taxed twice. When you withdraw the RRSP, the taxes on the RRSP withdrawals are withheld by the financial institution. The RRSP withholding tax rates for Canadians (except residents of Quebec) are 10%, 20% and 30% depending on the amount of withdrawal.
Later, at the time of filing the tax return, your RRSP income is treated as a part of your taxable income and you pay taxes on it just like your other income. The income from RRSP withdrawals during the year might push you up a tax bracket so you’ll have to pay taxes at a higher marginal tax rate.
RRSP contributions can help you reduce your taxable income so you pay less tax or get a tax refund (through taking tax credits and deductions). How much you should contribute to RRSP to avoid paying taxes depends on your total taxable income. To maximize your RRSP tax savings, you should talk to a financial advisor or use the Wealthsimple Tax calculator for the real-time calculation of RRSP tax savings. The maximum RRSP contribution limit in 2021 is $27,830 which means you can contribute up to $27,830 towards your RRSP during the year. For 2022, the maximum RRSP contribution limit is $29,210.
Get $10,000 managed free for a year.Get started