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 is your combined provincial and federal tax rate. You can see and calculate your personal tax rates here.
In many cases, the withholding tax rates are lower than your personal tax rate which will create a tax liability when you file your taxes. This is especially true for individuals still working who make an RRSP withdrawal.
RRSP Withholding Tax Rates
The RRSP withholding tax rates for Saskatchewan, all provinces (except Quebec) and territories are as follows:
- 10% on amounts less than $5,000
- 20% on amounts of $5,001- $15,000
- 30% on amounts greater than $15,000
When you make an RRSP withdrawal, you will have to declare if you want to make a net amount or gross amount withdrawal.
Net amount withdrawals are the net amount of money after withholding taxes. If you request a $10,000 net withdrawal, your institution will add a 20% withholding tax to withdrawal. The total amount withdrawn from your RRSP account will be $12,500. Calculated as $10,000 divided by (1 minus 20%).
Gross amount withdrawals is the total amount withdrawn from your RRSP account. If you request a $10,000 gross withdrawal, your financial institution will withhold 20% in taxes for CRA and $8,000 will be deposited to your account. Calculated as $10,000 minus ($10,000 x .20%).
Spousal RRSP Withdrawals
Spousal RRSPs are a hidden gem when tax planning for married and common-law couples. However, Spousal RRSP withdrawals need to consider attribution rules. Spousal RRSP places a 3-year attribution rule on withdrawals for the account owner and contributor.
If you’re considering Spousal RRSP withdrawal in 2020, your contributor must not have made a contribution to any Spousal RRSP account in your name in 2019 or 2018.
Example 1: I want to make a withdrawal from a Spousal RRSP account in my name that my wife contributed to in 2019. Because I did not wait 3 years, this money is “attributed” back to my wife and she will have to claim it as income based on her personal tax rates.
Example 2: I want to make a withdrawal from a Spousal RRSP account in my name that my wife made her last contribution to in 2017. Because she didn’t make any contributions this year and the two previous years, I will claim the RRSP withdrawal as income in my name and pay taxes based on my personal tax rates.
Remember, the attribution rules are based on the last contribution date, period. That means even if you skip years or have contributed for 20 years straight, to avoid attribution rules, you still have to wait the 3 years for any withdrawal.
Example 3: I want to make a withdrawal from a Spousal RRSP that my wife made contributions to in 2012 and 2019. I cannot designate to withdraw the 2012 contribution amount. I must wait until 2022 to avoid attribution rules.
Withdrawals from a Spousal RRIF
Attribution rules still apply for withdrawals from a Spousal RRIF with one exception. You can withdraw the RRIF minimum amounts without attributing any tax to the contributor.
Mandatory RRSP Withdrawals At Maturity
At age 71, you must close your RRSP accounts. There are several ways you can do this.
- Convert Your RRSP to a RRIF– A RRIF (Register Retirement Income Fund) is the income drawing version of an RRSP. Converting your RRSP to a RRIF is the most common option as you will use this money for income for the remainder of your retirement.
- Purchase an Annuity– You can purchase a registered annuity from an insurance company.
- Withdraw the Money– The most expensive option is to withdraw all of your RRSP money. Many Canadian’s retire with several hundred thousand dollars in their RRSPs and withdrawing 100% of them would mean paying up to 50% in tax on the money.
Tax Deferred RRSP Programs
There are two government programs that allow you to withdraw RRSP money as a loan to yourself. This money has to be paid back or you will be required to pay taxes on the withdrawal amount.
Home Buyers’ RRSP Plan
The Home Buyers’ Plan is for first time home buyers. You can withdraw up to $35,000 from your RRSP for a down payment on your house. If your spouse or common-law partner is also a first time home buyer, they too can withdraw up to $35,000 from their RRSP. That allows a healthy $70,000 down payment towards your new home.
Check out the full HBP details on the CRA website for eligibility and repayment rules.
Lifelong Learning program
The second tax deferred program is the LifeLong Learning Plan. This program allows you to withdraw up to $10,000 per year for you or your spouse to help pay for education or training. The maximum amount you can withdraw from your RRSPs in this plan is $20,000.
Click on this link for more information on the Lifelong Learning Program.
Frequently Asked Questions
- When can you withdraw from your RRSP? There are no limitations on when you can withdraw from your RRSP. You will have to claim any withdrawal as income in the year you make the withdrawal.
- Is there a limit to how much you can withdraw? No. You can withdraw 100% of your RRSP account(s) at any time. You will have to pay tax on the entire withdrawal in the year you make the withdrawal. This will be very expensive.
- How will an RRSP withdrawal affect my taxes? You must claim any RRSP withdrawals as income for the current tax year. You will be taxed at your personal marginal tax rate.