As the name implies, a registered retirement savings plan (RRSP) is for your retirement. And it can be tempting to take the savings out before you leave the workforce. After all, it is your money!
A lot of people say it’s never a good idea to raid these funds before retirement. (Cue: hidden costs!) But there are four reasons why you may want to withdraw from your RRSP early.
Read more: RRSP Withdrawal Rules and Taxes
When is a good time for early RRSP withdrawals?
Reason #1: To buy or build your first home
The Home Buyers’ Plan (HBP) lets you withdraw up to $35,000 from your RRSP to buy or build your first home without facing a double tax hit. Couples (legally married or common-law) can withdraw up to $35,000 each. Keep in mind, if you don’t repay the funds you withdraw over a specific period of time, taxes will apply.
Reason #2: To go back to school
Through the Lifelong Learning Plan (LLP), Canadians can take out money from their RRSPs to pay for their education. The maximum amount anyone can withdraw is $10,000 per year up to a maximum of $20,000 total. If you don't repay the funds over a specific period of time, it will be treated as an early redemption of your RRSP and you will have to pay tax on the money at your current marginal tax rate.
Reason #3: You’re taking a phased-in approach to retirement
Let’s say you’re 63, you’ve spoken with an advisor and you’ve decided to cut back your hours at work. Here’s how a phased-in retirement approach may play out.
Your income |
Your employment income is reduced. But you don’t want to start receiving your Canada/Quebec Pension Plan or employer pensions early at a reduced rate. And you’re too young to start receiving Old Age Security. |
|---|---|
Your options |
You could convert your RRSP to a registered retirement income fund (RRIF) or a payout annuity. After all, you’ll have to do that no later than the end of the year you turn 71, anyway. But you might not yet want the amount of ongoing income that RRIFs and annuities provide. |
A possible solution |
You’re looking for “bridge” income to supplement any employment income or personal savings you have. In this case, a lump-sum or regular scheduled withdrawals from your RRSP might make sense. |
Reason #4: Your health is a major concern
Talk to your family about your wishes and your advisor about your options for your RRSP if you:
- don’t expect to reach retirement age, and
- don’t have a spouse who is the beneficiary of your RRSP.*
*A spouse named as RRSP beneficiary can receive the entire RRSP balance without paying tax. However, they must transfer it directly to their RRSP or RRIF.
Talk to a professional before making RRSP withdrawals
Choosing to take money out of your RRSP early is a big decision. And a complicated one.
So, it’s best to talk to your advisor before you do anything.
Don’t have one? Find a Sun Life advisor today.
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.
