RRSP withdrawal basics and options

You’ve been working hard to build up your Registered Retirement Savings Plan (RRSP). You know all about the tax advantages of using an RRSP and know it’s one of the best long-term savings plans. The money is there for your retirement – but what happens then? When should it be withdrawn? And what about accessing funds before you retire? Here’s everything you need to know before you withdraw money from your RRSP.

RRSP withdrawal basics

When you take money out of your RRSP, it counts as income. That means that you’ll have to pay tax when you withdraw funds. Your financial institution will withhold the tax and send it directly to the federal government.

The major advantage of RRSPs is that they allow you to defer paying taxes on money you earn. So, assuming you withdraw the money in retirement, you’ll likely be in a lower tax bracket than when you contributed the funds and, as a result, will pay less in taxes at withdrawal.

The rate you’ll be taxed depends on the amount you withdraw and where you live.

Rates for Canadian residents:

• amounts up to $5,000 – 10% withholding tax (5% in Quebec)

• amounts over $5,000 up to $15,000 – 20% withholding tax (10% in Quebec)

• amounts over $15,000 – 30% withholding tax (15% in Quebec)

• Quebec residents will also have to pay provincial tax.

Once you’ve taken this money out of your RRSP, you’ll lose that contribution room. And because your withdrawal is income, you’ll be issued a T4-RRSP by your financial institution, and you’ll need to report this on your tax return. This could bump you up into a higher marginal tax rate.

One third of Canadians (37%) have withdrawn from their RRSP before age 71. The most common reason for making an early RRSP withdrawal is to buy a house (37%), followed by paying for daily expenses (19%) and paying off debt (18%). ^{footnote 11}

RRSP withdrawal before retirement

There are only two circumstances when you can make an early withdrawal, tax-free, from your RRSP.

• Home Buyers’ Plan (HBP): Intended to provide funds for a down payment on a first home the HBP lets you withdraw $60,000 tax free. If you’re married, you and your partner can each withdraw this amount individually. Because you’re borrowing the money from your RRSP, you do have to pay it back. You’ll have 15 years to repay the amount in full, and the first repayment is due two years after the withdrawal. You must pay 1/15th of the total amount each year. Failure to repay the money will trigger a penalty from the CRA.

• Lifelong Learning Plan: If you or your partner is going back to school, you can take $10,000 per year, up to a lifetime maximum of $20,000, to pay for full-time education or training. Disabled Canadians can use the same amount for part-time programs. (You cannot use this to pay for your child’s education.) You have 10 years to replace the funds, and you must repay at least 10% every year.