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.