RRSPs are an effective savings vehicle for retirement. However, they aren’t useful for when you’re in a financial pinch and you need money. Before you make a RRSP withdrawal, here is what you need to know.
Before you make an RRSP withdrawal, exhaust all other options of getting money. We find that it is cheaper to get a secured line of credit from your bank, a term loan, or make a withdrawal from your TFSA.
If none of these options are available to you then consider your options below.
Important Considerations of a RRSP Withdrawal
- Taxes– When you make a withdrawal from your RRSP, you have to claim the entire withdrawal amount as income in the year you make the withdrawal. For working individuals, this can put you into higher tax brackets and get very expensive.
- Contribution Room– You do not get your RRSP contribution room back after making a RRSP withdrawal.
- Withdrawal fees– Some institutions charge fees for redeeming your money. This can come in the form of an administration fee, a deferred sales charge fee, or a transaction fee commonly found in stock portfolios.
- Compounding interest– When you take money out of an RRSP plan, you lose the benefits of compounding growth on that money. This is a double penalty. Not only will you pay taxes, you also reduce the amount of compound growth you can earn.
Taxes on RRSP Withdrawals
When making an RRSP withdrawal, you have to factor in two types of taxes. The first is a withholding tax and the second is your personal marginal tax rate.
Withholding taxes are taxes withheld by your financial institution where your RRSP is held. These taxes are then forwarded to CRA on your behalf. This is meant to provide a layer of protection for investors so that you are not surprised by a large tax liability when you file your annual tax return.
Your personal marginal tax rate