RRSP Withdrawals: What You Need to Know

As tax season is in full swing, many people are actually making last minute contributions to their RRSPs. But what if you need to withdraw money from your RRSP instead? Here is what you need to know.

Home Buyer and Lifelong Learning Plans

The only 2 instances when you can withdraw money from your RRSPs without tax consequences are under the home-buyer plan and the lifelong learning plan.

I previously discussed the home-buyer plan here.

The lifelong learning plan allows for $ 10 000 to be withdrawn each year, in order to finance post-secondary education. The maximum total amount that can be withdrawn is $ 20 000, over a 4-year period. You have to repay the amount borrowed over a 10-year period. Each year, CRA will determine how much you have to repay and calculate your LLP balance outstanding.

The amount that you designate as a repayment when filing your taxes can’t be offset against your taxable income. You can designate a greater amount than the one set by CRA. If you’re unable to make the minimum repayment, the amount will then be included in your income, and be taxed accordingly.

Note that when your turn 71 or if you become a non-resident of Canada, you’ll need to repay the full amount.

RRSP Transfer

If you transfer your RRSP to another financial institution, or move money between your RRSPs, CRA doesn’t consider it to be a withdrawal. You won’t pay taxes.

Other Instances

If you withdraw money from your RRSPs outside of the above-mentioned programs, you’ll have to pay withholding taxes. The amount of taxes depends on how much you withdraw:

• Taking $5,000, means the withholding tax rate is 10%.
• Withdrawing between $5,001 and $15,000 means the withholding tax rate is 20%.
• Removing more than $15,000 means the withholding tax rate rises to 30%.

In addition to this, your financial institution may charge you administrative fees.

The taxation doesn’t necessarily end there, as the withdrawal amount is included in your taxable income. If your marginal tax rate is higher than the withholding tax rate, you’ll pay extra on your withdrawal.

You will also permanently lose the contribution room of the amounts you withdrew.

The Biggest Hidden Cost of RRSP Withdrawals

The biggest cost of prematurely withdrawing money from an RRSP is the loss on compound interests.

When you regularly save and invest, your earn interests and dividends that you can reinvest. It means you also earn interests on interests and dividends on dividends. That’s how your investments grow over time. You may also loose on potential capital gains, if your investments appreciate.

When withdrawing money from an RRSP before retiring, you’re also depriving your future retired self of that money.

That’s why I’m a proponent of not touching your RRSP until you retire and convert it to a RRIF or an annuity, or both.

I understand using your RRSP to buy a home or fund post-secondary education is tempting, and it can get you there. However, this isn’t the goal of an RRSP. an RRSP is a saving vehicle for your retirement.

Because CRA allows you to withdraw from your RRSP under specific programs doesn’t automatically mean you should withdraw from your RRSP.

Alternatives to RRSP Withdrawals

If you’re about to retire, it’s best to convert to RRSP to a RRIF, instead of making a lump-sum withdrawal. You’ll pay less taxes by doing so.

It’s better to liquidate non-registered accounts and TFSAs before raiding your RRSP. You may also be better off borrowing money from a line of credit or a credit card.

I know sh*it can and will happen. Withdrawing from your RRSP should be a last resort.