RRSP Withdrawals: Here’s What You Need to Know

Registered Retirement Savings Plans (RRSPs) offer valuable tax advantages that encourage long-term saving.

Contributions made to an RRSP are tax-deferred, meaning you won't pay tax on the income earned within the plan until you withdraw the funds.

But withdrawing from an RRSP isn't as simple as a regular savings account, so understanding how it all works is important.

Each withdrawal can trigger immediate withholding taxes and contribute to your taxable income. It might even push you into a higher tax bracket.

Once you withdraw from your RRSP, the contribution room used is permanently lost. This raises concerns about the cost of dipping into it too early.

To make it easier for you, we've compiled all of the most important information.

Keep reading to see what you need to know about RRSPs.

Can You Withdraw Money From an RRSP Anytime?

You can withdraw from your RRSP anytime with the exception of funds held in locked-in RRSPs.

Regular RRSPs allow flexible withdrawals with the drawback of tax implications.

Locked-in RRSPs, which are usually created from pension transfers, are subject to stricter rules.

These funds are governed by provincial pension legislation, which means they cannot be accessed until retirement age unless specific circumstances apply, such as financial hardship or shortened life expectancy.

Even if you badly need the funds, your access can still be restricted.

It's also important to consider that there is an irrevocable beneficiary on the RRSP.

If you've named someone who cannot revoke their beneficiary status, such as a minor or a person with cognitive impairments, you generally cannot withdraw funds without their consent.

In cases when they are legally unable to provide that consent, withdrawals can be blocked altogether.

Lastly, it's important to understand the difference between withdrawals and transfers.

Moving funds from one RRSP to another does not count as a withdrawal, and these transfers are not subject to tax, provided they are completed properly and directly.

Knowing the difference keeps you safe from accidentally triggering unintended tax consequences.

Tax Implications of Withdrawing From Your RRSP

Withholding Tax: What You’ll Pay Upfront

The first immediate tax consequence of withdrawing from your RRSP is withholding tax.

This is deducted at the time of withdrawal by your financial institution and sent to the Canada Revenue Agency (CRA).

The amount will depend on the size of the withdrawal and where you live.

For most provinces and territories, including Ontario, British Columbia, Alberta, and Nova Scotia, the withholding tax rate is 10% for withdrawals up to $5,000, 20% for amounts between $5,001 and $15,000, and 30% for withdrawals exceeding $15,000.

But in Quebec, rates are lower at 5%, 10%, and 15% respectively.

Marginal Tax Rate: The Hidden Cost

After the immediate withholding tax, the bigger cost of withdrawing lies in how it affects your marginal tax rate.

Any amount withdrawn from your RRSP must be reported as income in the year you take it out.

This added income is combined with other earnings and assets, which can push you into a higher tax bracket.

Not only will the RRSP withdrawal itself be taxed at a higher rate, but it could also increase the taxes you pay for other sources of income.

Even if you only take out a moderate sum, the withdrawal could trigger a chain reaction that inflates your total taxable income.

Many people are surprised to discover that the initial withholding tax deducted wasn't nearly enough to cover what they owe.

This extra income can also affect eligibility for certain government benefits or tax credits.

Why Early RRSP Withdrawals Can Be a Costly Mistake

There's a few reasons why early withdrawals can be a costly mistake.

First, you lose the benefit of tax-deferred growth.

RRSPs are designed to let investments compound over time, which means your money grows faster.

Taking funds out early interrupts this, reducing the potential long-term value of your retirement savings.

Second, any amount you withdraw permanently reduces your contribution room.

Unlike a Tax-Free Savings Account (TFSA), you cannot recontribute that amount in the future.

All things considered, dipping into your RRSP prematurely should be a last resort.

When RRSP Withdrawals Are Tax-Deferred

There are some situations where RRSP withdrawals can be made without immediate tax consequences.

Home Buyer’s Plan (HBP)

The HBP allows first-time homebuyers to withdraw up to $60,000 from their RRSP without paying withholding tax or including the amount as taxable income.

To do this, you need to meet CRA eligibility requirements, which includes being a first-time homebuyer and having the intention to use the home as your primary place of residence.

The withdrawn amount must be repaid over a 15-year period, beginning the second year after withdrawal.

The CRA issues an annual statement showing the remaining balance and minimum repayment required.

Failure to make the required payments means that missed amount will be added to your taxable income for the year.

Lifelong Learning Plan (LLP)

The LLP offers a similar tax-deferred benefit, allowing you to withdraw up to $10,000 per year with a lifetime limit of $20,000 from your RRSP.

This is for cases where you would need the money to fund education or training for yourself or your spouse. It doesn't apply to children.

Withdrawals can be spread over a maximum of four years, and repayments must begin five years after the first withdrawal with the full amount repaid over a 10-year period.

The CRA also sends annual LLP statements to keep track of the balance.

Failing to repay the LLP amount on schedule also results in the missed payment being taxed as income.

What Happens to Your RRSP at Age 71?

Your RRSP reaches its maturity deadline when you turn 71. On December 31st of that year, the Canadian government requires that you wind it down.

You can no longer contribute to the account, and you must choose how to receive the funds. There are three main options for collapsing your RRSP, with pros and cons to both.

Lump Sum Withdrawal

Taking a lump sum means withdrawing all funds in your RRSP at once. This option is rarely ideal unless the account balance is relatively small or you have little to no other income for the year.

Pros:

• Immediate access to all funds.
• Simple and straightforward process.

Cons:

• Entire amount is taxed as income in the year of withdrawal.
• Can push you into higher tax bracket.
• Loss of savings to taxes.
• No opportunity for continued tax-deferred growth.

Converting RRSP to RRIF

This is a more flexible option. With a Registered Retirement Income Fund (RRIF), your money continues to grow tax-deferred.

Pros:

• Flexible withdrawals beyond the annual minimum.
• Minimum withdrawals not subject to withholding tax.
• Control over how and when funds are withdrawn.

Cons:

• Mandatory minimum withdrawals increase with age.
• Withdrawals are taxable income.
• Withdrawing more than the minimum triggers withholding tax.
• Risk of depleting funds if not managed properly.

Purchasing an Annuity

This method guarantees income for life or a fixed period, depending on the terms of the contract. The downside is there is a lack of flexibility.

Pros:

• Eliminates risk of outliving your savings.
• Provides peace of mind in budgeting retirement expenses.

Cons:

• You can't change the terms or access lump sums after purchase.
• Payments are taxable as income.
• No residual funds left for heirs unless guarantee period is built in.

What’s the Best Way to Withdraw From an RRSP?

The best way to withdraw will depend entirely on your circumstances. There's no absolute right answer.

Each person's financial situation, retirement timeline, and income needs are all different.

Because these things can be so complex and carry a long-term impact, it's wise to speak with a certified financial advisor.

It's important to approach RRSP withdrawals with a strategy that's especially fit for you.