Zina Kumok writes about financial planning for Wealthsimple. She has eight years investing experience and five years experience as a personal finance writer. Her work has been featured in Investopedia, DailyWorth, MoneyUnder30 and DollarSprout. Zina runs a personal finance blog called ConsciousCoins.com and she has been a two-time finalist for ‘Best Personal Finance Contributor’ at the Plutus Awards. She has a Bachelor's degree in Journalism from Indiana University.
Taking full advantage of your investment portfolio isn’t just about promoting growth—it’s also about minimizing loss.
While you want to make sure the money you contribute is earning a reasonable return and growing steadily, you also want to eliminate fees and reduce your tax burden. The former can mostly be accomplished by reading the fine print, but the latter is a little trickier.
Finding a way to reduce what you pay in taxes becomes especially important when you need to access the equity in your account. Making tax-free withdrawals from your RRSP is entirely possible, but it gets a little complicated. We’ll walk you through everything you need to know.Wealthsimple Tax is a simple way to file your taxes. File your return with confidence it’s done right, and pay what you want—there’s no catch.
Home Buyers Plan
The Home Buyers Plan (HBP) is a tax- and interest-free loan that consumers can take from their RRSP to buy a house. First-time homebuyers can borrow up to $35,000 to use as a down payment. You must be a resident of Canada to apply.
The annual limit for the HBP program is $35,000. If you’re buying a home with your spouse, you can each withdraw $35,000 for a total of $70,000.
You need a written agreement confirming that you’re buying or building a home before you can access the money in your RRSP. You or a relative with a disability must be the person using the home.
If you’ve owned a house before, you must be at least four years removed from living in a home that you, your spouse, or common-law partner owned. If you bought a house in 2010 and sold it in 2013, for example, you’d have to wait until 2018 to use the HBP.
You also must repay the amount you borrowed before becoming eligible for another HBP. Money you withdraw must be in your RRSP account for at least 90 days before you can use it for an HBP.
The amount borrowed must be paid back in 15 years, starting the second year after the HBP was completed. Payments will be evenly divided each year. If you borrowed $25,000, for instance, you’ll have to repay $1,666.67 annually for 15 years. If you fail to repay your HBP for the year ( $1,666.67 in our example), then the outstanding balance will be added to your taxable income for the tax year.
Lifelong Learning Plan
The Lifelong Learning Plan (LLP) provides a way for consumers to withdraw money from an RRSP tax-free. You must use the funds to pay for education expenses incurred by you, your spouse, or your common-law partner. (The common-law partner must have lived with you for at least 12 months, be the parent of your child or have custody of the child. Note: You can’t use an LLP to fund the education of your child or your common-law partner’s child.)
The education or training must be a full-time program lasting at least three months and require 10 hours of coursework a week, not including homework or travel time. You have four years from the first withdrawal date to make other withdrawals. If you take your first distribution in 2020, you have until 2024 to make your final withdrawal.
The total amount withdrawn is limited to $10,000 in a calendar year and $20,000 total. You and your spouse or common-law partner are both eligible to use an LLP at the same time without affecting either of your contribution limits.
Money withdrawn from an LLP must be repaid to the RRSP in 10 years or less, and payments must be made in even yearly increments. If you pay more than necessary in one year, you could have a smaller payment the following year.
You can take advantage of the LLP several times, but you must repay the funds before you borrow from your RRSP again. You have 10 years to pay back the funds. How soon you have to start repaying, depends on how long you remain a qualifying student after the first LLP withdrawal.
Contributions must remain in the RRSP for at least 90 days before you can withdraw them for an LLP.
Having no income or low income
If your income in a tax year is low or you don’t have any income, you can receive RRSP withdrawals at lower tax rates or tax-free. You won’t be able to receive the entire withdrawal amount tax-free as you can with HBP or LLP but the RRSP withdrawal tax, charged at the time of withdrawal will be refunded after filing your tax return.
The federal basic personal amount for the tax year 2022 is $14,398. Let’s assume you don’t have income from any other sources in 2022, and you withdraw $10,000 from your RRSP. Your financial institution will withhold taxes on your behalf and remit it to the Canada Revenue Agency (CRA). Later when you file your taxes, you can receive a tax refund because your income for the year was less than $14,398.
Similarly, your provincial tax will also be zero if you have no income from any other sources and RRSP withdrawals are below the provincial basic amount. For example, if you live in British Columbia, the basic personal amount is $11,302 for the tax year 2022. So, the RRSP withholding tax deducted from your RRSP withdrawal will be refunded upon filing taxes. Moreover, you might be eligible for federal and provincial tax credits and deductions that can increase your tax refund.
If you want to withdraw from your RRSP and also achieve tax savings, you should withdraw the RRSP amount during no-income or low-income years.
What early withdrawal means
The LLP and HBP programs offer a unique opportunity to use the money tax-free and interest-free. Unfortunately, there are some downsides to using money from your RRSP to fund your education or home purchase.
When you borrow money from your RRSP, that money can no longer earn interest. Every dollar you withdraw from your RRSP is one less dollar of your retirement income that compounds and grows. Even though you’re not paying interest on your RRSP withdrawals, you’re losing out on future interest you could earn if the money stays in the RRSP.
If you can’t afford to repay the RRSP, things start to get complicated. If you borrowed $10,000 from your RRSP for an LLP or HBP, you’ll have to repay $1,000 a year for 10 years. If you can only afford to pay $500 this year, the government will add the $500 difference as income on your taxes.
Before borrowing money from your RRSP, run your budget and see if you can afford the payments. If possible, practice paying that money every month to see whether or not it’s feasible.
If you discover that you can’t afford RRSP payments or don’t want to sabotage your retirement account, consider using money from a savings account instead, such as the Tax-Free Savings Account (TFSA). Money in a TFSA can be withdrawn with no tax consequences. You can withdraw as much as you want for any reason.
TFSAs have a maximum annual contribution limit of $6,500 for 2023. If you withdraw money from your TFSA, the withdrawn amount will be added to your contribution limit for the following year.
Before signing up for an HBP or LLP, consider the consequences of doing so. You might have to forego retirement earnings, which could affect when you retire. You’ll also be signing up for one more loan. Make sure to run the numbers carefully so you know what you’re signing up for.
How to Withdraw RRSP Savings Without Paying Taxes—FAQ
RRSP withdrawals in Canada (except Quebec) are taxed at following rates:
10% on amounts up to $5,000
20% on amounts more than $5,000 but less than or equal to $15,000
30% on any amount over $15,000
RRSP withdrawals in Quebec are taxed at following rates:
5% on amounts up to $5,000
10% on amounts more than $5,000 but less than or equal to $15,000
15% on any amount over $15,000
In Quebec, you also pay provincial tax on RRSP withdrawals at 15%.
You can withdraw RRSP tax-free to buy a house or build a house through Home Buyers Plan (HBP) or to pay for your full-time education through Lifelong Learning Plan (LLP). To optimize tax savings when withdrawing RRSP funds, you should consult a financial advisor.
Generally, all withdrawals from Registered Retirement Savings Plan (RRSP) are taxable. However, you can receive RRSP withdrawals tax-free through the Home Buyers Plan (HBP) and Lifelong Learning Plan (LLP). Also, if you withdraw funds from your RRSP and your income for the tax year was less than the provincial and federal basic amount, the tax will be refunded to you when you file taxes.
The withholding tax on RRSP withdrawals (except Quebec) is:
10% for amounts up to $5,000
20% for amounts more than $5,000 but less than or equal to $15,000
30% for amounts over $15,000.
In Quebec, you pay:
5% for amounts up to $5,000
10% for amounts more than $5,000 but less than or equal to $15,000
15% for amounts over $15,000.
In Quebec you also pay provincial tax on RRSP withdrawals at 15%. Depending on your province, your income tax payable changes.
To check if your RRSPs are locked-in or not, contact your RRSP issuer. Funds from RRSPs that are not locked in can be withdrawn any time. You can withdraw your RRSP before retirement whenever you want but you’ll have to pay taxes on early withdrawals. You should report your income from early RRSP withdrawals for the year on line 12900 of your tax return.
You can withdraw from your RRSP at any age, but you’ll have to pay taxes on withdrawals. When you turn 71 (on December 31 of the same year), you must withdraw the funds in your RRSP as a lump-sum amount, or you can convert it into Registered Retirement Income Fund (RRIF), or purchase an annuity.
The RRSP is a tax-free savings plan. As long as the funds are in an RRSP, you won’t have to pay taxes. After retirement, when you receive RRSP payments through a Registered Retirement Income Fund (RRIF), or annuity, you’ll have to pay taxes. Also, if you choose to withdraw funds before retirement, you’ll have to pay taxes.
RRSP funds can be withdrawn any time if they are not locked-in.
Funds in an RRSP can grow tax-free as long as they remain inside it. When you receive payments after retirement or withdraw amounts before retirement, you’ll have to pay withholding taxes.
You can use the Home Buyers Plan (HBP) or Lifelong Learning Plan (LLP) to receive tax-free withdrawals.
Income from RRSP withdrawals must be reported on line 12900 of your income tax return.
The tax rules are the same for everyone withdrawing their RRSP funds before and after retirement. RRSP withholding tax is the same regardless of age group.
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