RRSP Withdrawal Rules and Taxes

Last updated: January 9, 2024

Putting money into Registered Retirement Savings Plans (RRSPs) can be a great way for Canadians to save for retirement as it can offer some tax benefits. But making withdrawals from these plans may affect your tax bill. Learn more about the rules and potential costs of withdrawing from an RRSP to make the most of your plan.

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When can you withdraw from RRSPs?

You can withdraw from an RRSP at any time if your funds are not in a locked-in plan. 

In general, when you withdraw from an RRSP, you need to include the withdrawn amount as income when filing your taxes. When you withdraw from your RRSP, your bank or financial institution will withhold a certain percentage (typically between 10% to 20%) of the withdrawal amount for income tax purposes. 

These funds will be sent directly to the Canada Revenue Agency (CRA) or Revenu Québec (for residents in Québec) on your behalf. The funds are a pre-payment against your total tax liability for the year. 

When you file your income tax return for that year, the withheld amount is applied against any income tax owed on your taxable income, including the RRSP withdrawal. This means that if the withheld amount is more than your actual tax owed, you will receive a tax refund. If not enough was withheld, you may owe additional tax.

However, how you choose to withdraw and when you choose to withdraw can have differing tax implications:

 

Mandatory RRSP withdrawals at maturity (by the end of the year you turn age 71)

By the end of the year you turn age 71, you must convert your RRSP to income options or withdraw all your RRSP funds.

RRSP maturity options Withholding tax Income tax
1. Withdraw all your RRSP funds at maturity. The entire amount will be subject to withholding tax. The withholding tax is taken out of your withdrawal immediately. The entire amount must be added to your income when filing taxes. You’ll receive a credit for any withholding tax taken from your RRSP withdrawal.
2. Convert your RRSP to a RRIF. A RRIF pays you income during retirement. You must take at least annual minimum withdrawals from your RRIF. There is no withholding tax on the minimum amount withdrawn from a RRIF. But withholding tax applies to any amount withdrawn from a RRIF above the minimum. The full amount of your withdrawal (the minimum amount plus any amount you withdraw above that) is income and is treated as such on your tax return. You’ll receive a credit for any withholding tax taken from your RRIF withdrawal.
3. Purchase a life annuity. A life annuity offers guaranteed income for life. No withholding tax. The full amount of your annuity payment is income. You’ll have to pay tax on those payments at your marginal tax rate when you start receiving payments from an annuity.

Withdrawing from an RRSP before maturity (early RRSP withdrawal)

There are some additional tax implications and investment opportunity costs if you decide to withdraw from an RRSP before maturity:

  • You pay a withholding tax on the amount you withdraw (whether it consists of original contributions and/or investment growth). How much you pay depends on the amount and your residence. While the withholding tax is credited back to you when you file your tax return, the amount reduces the amount you receive from your withdrawal and the capital in your RRSP. This means you will have less money invested and earning a return between the time of withdrawal and when you file your taxes.
  • You pay income tax. Your withdrawals must be added to your income when filing taxes.
  • You lose your contribution room. When you withdraw from an RRSP, you don’t get your contribution room back. If you withdraw $1,000, you won’t be able to recontribute it later, unless you have RRSP contribution room. This means you’ll have less money in the account to benefit from potential investment growth. Tax Free Savings Accounts are different – you can recontribute your withdrawal starting in the year after that withdrawal, without needing any additional TFSA contribution room.

Tax-deferred Withdrawals:

There are some situations where you can withdraw from your RRSP without paying tax.

 

For example, you can use a portion of your RRSP to buy a home for the first time (Home Buyer’s Plan (HBP)). Or, you can use your RRSP for you or your spouse’s education (Lifelong Learning Plan (LLP)). 
 

In both cases, you can take money out tax-deferred. This means you don’t need to pay withholding tax or income tax. However, you will have to pay back the funds into your RRSP within the applicable timelines or the money you took under these plans will be treated as taxable withdrawals.
 

Connect to a Sun Life advisor to find out if the HBP or LLP are options that meet your needs

 

Note: Thinking of transferring funds from an RRSP to FHSA? You can transfer funds from an RRSP to an FHSA tax-free. However, you can’t claim the amount transferred as a deduction on your tax return under the FHSA plan. You’ll lose your RRSP contribution room. Also, the maximum you can transfer from an RRSP to an FHSA is $8,000 annually, with a $40,000 lifetime limit.

Learn more about FHSA vs RRSP

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

The withholding tax is the amount of funds taken directly by your financial institution and sent to the CRA or Revenu Québec when you make an RRSP withdrawal. The withholding tax rate depends on how much you withdraw and where you live. 

If you are a resident of Canada, the withholding tax rates are:

  • 10% (5% for Québec residents) on amounts up to $5,000
  • 20% (10% for Québec residents) on amounts over $5,000 up to and including $15,000
  • 30% (15% for Québec residents) on amounts over $15,000

Residents of Québec: In addition to the amounts withheld for the CRA, Québec residents will have 14% of the withdrawal withheld for Revenu Québec.

Non-residents of Canada: Non-residents of Canada pay 25% withholding tax rate, regardless of the size of withdrawal.

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Spousal RRSP withdrawals

Since your spouse or common-law partner is the owner of a spousal RRSP, they’re the only person who can take withdrawals from it. They can withdraw from their spousal RRSP at any time. But there may be tax consequences for both spouses or common-law partners. 

Learn more about spousal RRSP

More FAQs about RRSP withdrawals

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.

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 into a lower tax-bracket. In this case, you’re likely to pay less tax on your RRSP withdrawals.

Do you have to pay back your RRSP withdrawals?

No, you don’t have to pay back your RRSP withdrawals unless they were made under the Home Buyer’s Plan or the Lifelong Learning Plan.

If you don’t repay withdrawals made under the HBP or LLP within the applicable time limits, you’ll have to include the withdrawn amounts as RRSP income on your income tax and benefit return.

Note: A direct transfer from an RRSP to an FHSA does not count as an RRSP withdrawal. You can transfer funds from an RRSP to an FHSA tax-free. However, you can’t claim the amount transferred as a deduction on your tax return under the FHSA plan. You’ll lose your RRSP contribution room. Also, the maximum you can transfer from an RRSP to an FHSA is $8,000 annually, with a $40,000 lifetime limit. 

Learn more about FHSA vs RRSP

Do withdrawals from an RRSP count as income?

Yes. When you withdraw money from an RRSP, it’s considered taxable income. You’ll get a T4RSP (Statement of RRSP income) slip reporting the amount withdrawn. This must be included on your tax return.

Does withdrawing from an RRSP affect your credit score?

No, withdrawals from an RRSP are not reported to the credit bureaus. They won’t affect your credit scores.

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. 

When you make a transfer, it’s considered a withdrawal from your RRSP. The amount withdrawn minus withholding tax is deposited to your TFSA. Also, the entire withdrawal is treated as taxable income and must be included in your tax return.

Connect with an advisor for more detailed information

Do RRSP withdrawals affect OAS?

Yes, your RRSP withdrawals can impact your Old Age Security (OAS)  OAS is a monthly payment you can get from the government if you’re age 65 or older.Connect with an advisor for more detailed information on how RRSPs affect your government benefits.. RRSP withdrawals are considered income. 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 the OAS clawback. The clawback applies if your net income is above a specific threshold amount. When this happens, you may have to pay back some or all of the money that the government gave you under OAS. 

Connect with an advisor for more detailed information on how RRSPs affect your government benefits

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

No, you’re not shutting down your RRSP when you make withdrawals. However, you’re legally required to convert or close your RRSP by the end of the year you turn age 71.

What happens to an RRSP if you move out of Canada permanently?

If you have an RRSP and you move out of Canada permanently, you can either choose to:

  • Make a lump sum withdrawal and deregister your RRSP. You’ll have to pay withholding tax and income tax on the amount withdrawn.
  • Keep your RRSP and have your investments grow tax-deferred for Canadian tax purposes. If you choose to keep your RRSP intact, it’s important to know that some countries may not have tax deferral available. Even if the country allows RRSP tax deferral (like the United States), individual states may not for state income tax purposes (for example, California). Talk to a tax specialist to learn more.

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