RRSP Withdrawal Rules and Taxes

Thinking of withdrawing from your RRSP? Here are some rules and tax implications to consider first. 

Can you make RRSP withdrawals whenever you want?

Yes, you can, as long as your fund are not in a locked-in plan. But it’s also important to know that there’s a portion of your RRSP withdrawal that’s subject to withholding tax – this is taken immediately and sent to the Canada Revenue Agency (CRA) or Revenue Quebec (for residents in Quebec).  

When do you pay taxes on an RRSP?

RRSPs offer tax-deferred savings. This means you won’t have to pay tax on your investments and any income earned on those investments until you start withdrawing funds.

What is the RRSP withdrawal withholding tax and how much tax do you have to pay?

The withholding tax is the amount that’s withheld and sent to the CRA or Revenue Quebec whenever you make an RRSP withdrawal. The amount of tax that’s withheld varies between 10% to 30%. The exact amount of tax that’s withheld depends on how much you withdrew and your residency.

You must include the amount you withdrew from your RRSP as income when you file your tax return. At this time, you may have to pay additional tax. The amount of tax you pay depends on:

  • how much you withdrew from your RRSP and
  • how much other income you earned in the year of the withdrawal. 

What happens when you withdraw money from an RRSP early?

Sometimes things happen in life that may lead you to dip into your RRSPs in your 30s, 40s or 50s. Before you do, it’s important to know that early withdrawals from RRSPs may result in you losing contribution room (other than withdrawals through the Home Buyers’ Plan or the Lifelong Learning Plan). Once you take money out of an RRSP, you can’t replace the amount you had previously put into your account. This reduces the potential value of your RRSP when you’re ready to retire. Learn more about the hidden costs of early RRSP withdrawals.

How do you withdraw from an RRSP without paying tax?

You can withdraw from an RRSP without paying tax if you’re using the funds to buy a home as a first-time homebuyer or pay for full-time training or education. The government treats withdrawals to buy your first home (Home Buyers’ Plan) or finance education or training for yourself or your spouse or common-law partner (Lifelong Learning Plan) differently from all other RRSP withdrawals. Funds borrowed under the Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP) are not taxable, as long as you repay the money to your RRSP within specific timelines. If these repayments aren’t made within specified timelines, you’ll owe tax on the amount you don’t repay.

The HBP allows first-time homebuyers withdraw up to $35,000 (per person) from their RRSP without paying withholding tax. This is provided you meet the CRA’s eligibility criteria and other conditions.

The LLP allows you or your spouse or common-law partner to withdraw up to $10,000 per calendar year (with a maximum lifetime withdrawal of up to $20,000) for full-time training or education. To qualify for HBP or LLP, certain conditions must apply, including but not limited to repayment of the funds withdrawn within a specified time period. Connect with an advisor to find out if the HBP or LLP are options that meet your needs.

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Do you pay taxes on your RRSP after age 65?

You’ll have to pay taxes anytime you withdraw from an RRSP, regardless of your age. However, if you’re not working at age 65, there’s a chance that you might be in a lower tax bracket than you were in your working years. In this case, you’re likely to pay less tax on your RRSP withdrawals.

Keep in mind, you can only keep an RRSP until age 71. By December 31 of the year in which you turn 71, you’re required to close your RRSP account and choose between any combination of the following options: 

1 Please note that if you choose to withdraw funds from your RRSP, the withdrawn amount will be subject to withholding tax.

2 Withholding tax is not applied on amounts that are used to purchase an annuity. But you may have to pay tax on the income when you start receiving payments.

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Do you pay taxes on your RRSP when you retire?

Yes, you’ll have to pay taxes on RRSP withdrawals even when you retire. However, if you’re earning less in your retired years, then you may fall in a lower tax-bracket. In this case, you’re likely to pay less tax on your RRSP withdrawals. But remember that you can only keep your RRSP until age 71. By December 31 of the year in which you turn 71, you’re required to close your RRSP account and choose between any combination of the following options: 

1 Please note that if you choose to withdraw funds from your RRSP, the withdrawn amount will be subject to withholding tax.

2 Withholding tax is not applied on amounts that are used to purchase an annuity. But you may have to pay tax on the income when you start receiving payments.

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Do you have to pay back your RRSP withdrawals?

You can’t recontribute money that you withdrew from your RRSP, unless with withdrawal was made under the Homebuyers’ Plan or the Lifelong Learning Plan. HBP repayments begin the second year after the year when you first withdrew funds from your RRSP. The funds withdrawn for LLP are repaid over a 10-year period, typically starting five years after your first withdrawal. If you don’t repay withdrawals made under HBP or LLP, you’ll have to include it as a RRSP income on your income tax and benefit return.

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Do withdrawals from an RRSP count as income?

Yes, they do. When you withdraw money from an RRSP, it’s included in income. You’ll get a T4RSP (Statement of RRSP income) slip reporting the amount withdrawn. This will be included in income when you file your taxes.

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Do you have to report RRSP withdrawals on your tax return?

Yes, you have to include it on your tax return. When you withdraw money from your RRSP, it’s included as income. You can claim the amount of tax withheld at the time of your RRSP withdrawal when you file your taxes. This tax withheld will reduce your total tax bill. 

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Can you transfer money from an RRSP to a TFSA without paying taxes?

No, there isn’t a way to transfer funds from an RRSP to a TFSA without paying tax on the amount transferred. When you make a transfer, it’s considered a withdrawal from your RRSP and then the amount withdrawn is contributed to your TFSA. As with any RRSP withdrawal, taxes will be withheld and sent to the CRA or Revenu Quebec. You’ll still have to report the amount withdrawn from your RRSP as income when you file your taxes – at which point, you may have additional income tax to pay. Connect with an advisor for more detailed information.   

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Do RRSP withdrawals affect OAS1?

Yes, your RRSP withdrawals can impact your Old Age Security (OAS)1OAS is a monthly payment you can get from the government if you’re age 65 or older.  because RRSP withdrawals are considered income and the amount of money you get from OAS depends on how much income you earn from all sources of income. Your RRSP withdrawals may trigger the pension recovery tax, which is commonly referred to as an OAS clawback. This kicks in if your net income (line 23400 on your income tax return) is above a specific amount of money – also called a threshold amount. When this happens, you may have to pay back some of the money the government gave you under OAS. Connect with an advisor for more detailed information on how RRSPs affect your government benefits.

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Can you withdraw from an RRSP before retirement?

You can make withdrawals from your RRSP at any time. Certain amounts of tax will be withheld at the time of the withdrawal and paid to the CRA or Revenu Quebec.  You may also owe additional income tax when you file your annual income tax return, in connection with the RRSP withdrawal.  The amount of tax you’ll have to pay depends on all the financial information reported on your income tax return. So if you make withdrawals during your working years, you may be in a higher tax bracket than you would be in your retired years. In this case, you’ll have to pay more tax on RRSP withdrawals that were made before retirement. 

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Is a withdrawal from an RRSP the same as shutting it down?

You’re not shutting down your RRSP when you make withdrawals. However, you’re legally required to close your RRSP when you turn 71. At this age, you’ll have 3 options (you can apply any one, two or three of these options):

1 Please note that if you choose to withdraw funds from your RRSP, the withdrawn amount will be subject to withholding tax.

2 Withholding tax is not applied on amounts that are used to purchase an annuity. But you may have to pay tax on the income when you start receiving payments.

Connect with an advisor for more detailed information.

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