There may come a time when you need to withdraw money from your registered retirement savings plan (RRSP) before you retire. So, what are the consequences if you do? The major penalty will be a withholding tax charged on your withdrawal.
Remember, there are options to obtain funds from your RRSP without being charged a withholding tax, like the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP). You’ll learn how these programs work later in this article.
First, let’s break down how RRSP charges work, when they apply, and how to reduce them.
Key Takeaways
● RRSP withholding tax ranges from 10% to 30%, depending on how much you withdraw.
● The withdrawn amount affects your contribution room and can’t be repaid.
● The tax rates differ for Quebec citizens and non-residents of Canada.
● Some RRSP withdrawals, like those under the HBP or LLP, are not subject to withdrawal taxation, but must be repaid.
● At the age of 71, you must transfer your RRSP funds to a RRIF, buy an annuity, or fully withdraw money from your RRSP.
RRSP Withdrawal Rules
A Registered Retirement Savings Plan (RRSP) is a government-registered account that helps you save for retirement. If you contribute to an RRSP, you don’t pay tax on the money you invest as long as it remains in the plan. As you retire and withdraw funds, it's considered income and requires compliance with related regulations. Still, it’s helpful to know how an RSP vs RRSP differs, as this can affect your withdrawal options and taxation treatment.
If you want to take out money early, it’s necessary to understand the tax implications and rules set by the Canada Revenue Agency (CRA). For example, you’ll have to pay a special charge called RRSP withholding tax. The RRSP withholding tax varies depending on the amount you take out:
● Up to $5,000 — 10% withheld (5% in Quebec).
● $5,001-15,000 — 20% withheld (10% in Quebec).
● Over $15,000 — 30% withheld (15% in Quebec).
● Non-residents of Canada pay 25% with a possibility to reduce the amount through tax treaties.
You must report the full amount withdrawn as taxable income, and the paid charge is considered a credit. Then, if you are in a higher tax bracket, you’ll owe more. If it’s lower, you’ll get a refund.
Remember that once you take out money from your RRSP, you permanently lose that contribution room and can’t put that amount back. Thus, early RRSP withdrawals should be a last resort, as they can reduce your retirement total income and lead to higher taxes today.
The Canadian government sets exceptions that allow you to withdraw funds tax-free. They include:
● Home Buyers’ Plan (HBP): You can withdraw up to $60,000 to buy or build your first home. In this case, the repayment period is 15 years, starting from the second year after withdrawal. For withdrawals made between 2022-2025, repayment starts from the fifth year.
● Lifelong Learning Plan (LLP): You have an option to withdraw up to $20,000 to pay for full-time education. The repayment period is 10 years, and you must begin repaying your withdrawals no later than the fifth year after your first LLP withdrawal. In some cases, if you are not considered a qualifying student for at least three consecutive months in two straight years, repayment may start earlier, typically the second year after the withdrawal. If you have a Spousal RRSP, only the account holder can withdraw money. Still, if the contributing spouse made payments in the past three years, the income may be attributed back to them.
When you turn 71, you must convert your RRSP into a Registered Retirement Income Fund (RRIF), buy an annuity, or fully withdraw your RRSP funds. All these options have different tax implications and requirements. For more on managing your retirement savings efficiently, learn how to open an RRSP account and start planning smart withdrawals.
Can You Withdraw from an RRSP Now?
Actually, you can withdraw money from your RRSP whenever you want if your account isn’t locked in. Locked-in RRSPs, often from workplace pension plans, don’t allow withdrawals until you retire or meet special conditions. Listed conditions include financial hardship amid
serious expenses (rent, medical, low income), non-resident status, age of 55 years or more, or shortened life expectancy certified by a doctor.
As for regular RRSPs, they allow you to withdraw at any time. Still, it’s important to consider withholding tax and other requirements.
Here’s a breakdown of when you can withdraw funds from an RRSP:
● Anytime: You can access your plan, but the money you withdraw will be considered as part of your income for the calendar year and may result in you paying higher taxes.
● HBP: Withdraw up to $60,000 for your first home tax-free. The repayment is required over 15 years.
● LLP: Obtain up to $20,000 for full-time education and repay during 10 years.
● Retirement: Before December 31 of the year when you turn 71, you must convert your RRSP into a Registered Retirement Income Fund or consider other options like buying an annuity or withdrawing the full amount.
How to Withdraw Funds from an RRSP The process of withdrawing from your RRSP account is simple. However, you should complete several steps to comply with regulations and avoid surprises at tax time. Here’s a step-by-step checklist to help you:
1. Submit a withdrawal request. Contact your financial institution online, by phone, or in person. You should provide information on the amount you want, your bank account details, and a reason (general withdrawal, HBP, LLP).
2. Check the withholding tax. The institution will apply RRSP withholding tax based on the amount you request.
3. Receive your payment. The remaining amount (after taxation) is deposited into your account or sent as a cheque.
4. Get your T4RSP slip. Your issuer will send you a tax slip showing how much you withdrew and how much tax was withheld.
5. Report it on your tax return. Include the full amount as your income and claim the withholding tax as a credit when filing. 6. Keep in mind that withdrawing early may increase your tax bill, affect your RRSP contribution limits, and reduce your future retirement income.
If you’re withdrawing for the Home Buyers’ Plan or Lifelong Learning Plan, you typically need to follow a different repayment schedule, but the basic withdrawal steps remain similar.
How Much Withholding Tax Will You Pay?
If you want to take funds from your registered retirement savings plan, your financial institutions will withhold a portion of it as RRSP withholding tax. This money is sent to the Canada Revenue Agency (CRA) as a prepayment of your income tax.
According to the Canadian withholding rates, the amount withheld immediately depends on how much you withdraw from your RRSP, so let’s look at how this works in practice.
● Withdraw $4,000, the financial institution withholds 10%. Thus, you receive $3,600.
● Withdraw $10,000, they withhold 20%. Thus, you receive $8,000.
● Withdraw $20,000, they withhold 30%. Thus, you receive $14,000.
Still, you must report the full amount as taxable income on your tax return. Depending on your total guaranteed income this calendar year, you may owe more or get a refund at tax time. In addition, if you live in Quebec or aren’t a Canadian resident, you’ll have other tax rates, depending on the withdrawal size and treaties.
Keep in mind, RRSP withdrawals reduce your retirement savings and can’t be re-contributed, unlike those from tax-free savings accounts (TFSAs). Planning your withdrawals carefully can help avoid legal penalties.
How to Cut Tax When Withdrawing RRSP Funds
Withdrawing money from your RRSP involves paying withholding tax. But there are ways to reduce or avoid it. For example, one popular option is the Home Buyers’ Plan that lets you withdraw up to $60,000 for your first home. While these funds are tax-free and don’t require paying withholding tax, you still need to repay this amount over 15 years.
The other option to avoid paying a charge when taking money from the RRSP before your retirement is the Lifelong Learning Plan. With it, you can obtain up to $20,000 for education. This option requires repayment within 10 years. In addition, consider using other funding sources, like a TFSA or a loan, if you’re under retirement age.
Once you reach retirement, you may convert your RRSP into a RRIF and take minimum annual withdrawals without paying an RRSP withholding tax. However, these funds count as taxable income. Be aware that splitting RRSP withdrawals into smaller amounts won’t reduce taxes. It will still be aggregated by your financial institution.
Bottom Line
Managing RRSP withdrawals with careful planning can help you reduce or avoid withholding tax and long-term consequences. It doesn’t matter if you plan to convert to a registered retirement income fund, use your finances for education, or buy a home; every option has specific requirements and financial implications.
Remember to consider your current tax bracket, potential income tax, and how the CRA treats these transactions. Thinking ahead can protect your retirement savings and keep you from paying more than necessary. Contact us to start smart retirement planning and secure your financial future.
FAQ
What is Withholding Tax?
When you want to withdraw funds from a regular, not locked-in RRSP, your financial institution will withhold a portion of the amount and send it to the CRA. For Canadian residents, the tax rates are:
● Up to $5,000 – 10% withheld (5% for Quebec residents).
● $5,001-15,000 – 20% withheld (10% in Quebec).
● Over $15,000 – 30% withheld (15% in Quebec).
● Non-residents pay 25% with a possibility to reduce the amount through treaties.
Still, this is only a prepayment, not the final tax bill. Thus, you must reconcile the difference when filing your return.
How Do I Get Funds from My RRSP?
If you decide to take money from your RRSP, you should follow a simple checklist that helps you avoid tax implications.
1. Ensure your RRSP is not locked-in.
2. Choose an amount you need and what it’s for (general withdrawal, HBP, LLP).
3. Submit a withdrawal request to your financial institution. You can do it online, by phone, or in person.
4. Receive the money, excluding the RRSP withholding tax that is applied immediately. 5. Remember to include the full withdrawal in Line 12900 and claim the withheld amount in Box 30 on your T4RSP.
Can I Withdraw from My RRSP Without Paying Tax?
Yes, you can withdraw from your RRSP without taxation under some special programs. The Home Buyers' Plan (HBP) allows you to obtain up to $60,000 to build or buy your first home. You must repay this amount within 15 years. The Lifelong Learning Plan (LLP) offers withdrawal of up to $10,000 per year, $20,000 maximum, for education. You must repay it within 10 years.
For all other RRSP withdrawals, withholding tax applies immediately, and the full amount counts as taxable income.