Maybe you’re facing a layoff or feeling the effects of market volatility. Maybe you have higher expenses due to high inflation. And maybe you’re eyeing your savings as a possible source of emergency funds. 

Whatever the situation, you may be wondering if it’s ever smart to make early withdrawals from a registered retirement savings plan (RRSP). In most cases, the answer is no.

Here are three hidden costs of making an early RRSP withdrawal.

What happens when you withdraw money from your RRSP early?

Early withdrawals from RRSPs have three major costs:

1. You’ll miss out on the advantages of compound interest

An RRSP works best with long-term, steady contributions. That way, your savings grow because the interest you earn also earns interest. The interest on that interest earns interest, and so on. This is compound interest.

When you take money out of your RRSP early, you lose the opportunity to earn money while it’s invested.

Remember, the government will not tax you on money growing in your RRSP until you take it out.

2. You'll have to pay tax on your RRSP withdrawals

If you take money from your RRSP, the government will charge a RRSP withholding tax. The amount you pay depends on the amount you withdraw and where you live.

  • 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%.

Note these tax rates apply everywhere in Canada except Quebec. In Quebec, the federal rates are lower, but provincial tax rates apply in addition to the federal withdrawal rate.

The taxes don’t end there. Your taxable income will include the RRSP withdrawal for the year. So, if your marginal tax rate* is higher than the withholding tax rate, you’ll pay extra on your withdrawal.

* The marginal tax rate is the amount of additional tax paid for every additional dollar earned as income.

Withdrawals from a spousal RRSP can also carry additional risks. Let’s say you’re making ongoing contributions to a spousal RRSP and your spouse withdraws funds. If there has not been a spousal contribution in the last three years, then attribution rules do not apply. All or a portion of the withdrawal will be included in your taxable income and not your spouse’s. This may result in an additional tax implication if you’re in a higher tax bracket than your spouse. It’s best to check with an advisor before making a withdrawal to see how it may affect you. They can help you manage your finances and make the most of your investments. 

3. You’ll permanently lose RRSP contribution room

You can put only so much into your RRSP. And once you take money out, you can’t replace the amount you had previously put into your plan. This reduces the potential value of your RRSP when you’re ready to retire.

What can you do if you need emergency funds?

Simply put, experts advise you not take money from your RRSP before you retire. If a financial emergency arises and you need cash, there are some alternatives to consider:

  • You can take money out of your tax-free savings account (TFSA). A TFSA is a good place to keep an emergency fund. Why? Because you can put back any money you take out the following year. (Be sure to repay your TFSA promptly, to minimize the loss of investment growth.)
  • You can withdraw funds from non-registered assets. This might include guaranteed investment certificates (GICs), mutual funds or stocks. If you have these assets, consider using them before touching your RRSP. Unlike withdrawing funds from an RRSP, withdrawing funds from these investments won’t increase your taxable income (unless there is an unrealized capital gain that is realized at redemption). Keep in mind, you’ll be giving up the potential investment earnings.

Before you tap any of these non-registered savings, consider:

  • Had you planned to use these funds for retirement? Then you may have to adjust your retirement savings plan. Make some tweaks to ensure that you’ll still have enough funds to afford the lifestyle you want. Our Retirement savings calculator can help you figure out how much you need to save for when you stop working.
  • Has a financial emergency left you looking for an ongoing source of cash? If so, start by re-evaluating your budget and temporarily reducing expenses you don’t need. Use our monthly budget calculator to figure out where your money goes.


An advisor can help put together a solid plan that suits your goals.

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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.