JULY 5, 2022

Read time: 4 minutes

Are you considering dipping into your savings to cover an unforeseen expense? Maybe you’re facing a layoff or were surprised by recent market volatility or higher expenses due to high inflation?

Maybe you’re eyeing your retirement savings as a possible source of funds. But is it smart to make early withdrawals from a registered retirement savings plan (RRSP)? In most cases, the answer is no.

Here’s what you need to know before you withdraw money from your registered savings.

Watch time: 1 minute 45 seconds

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 called compounding.

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

Remember, you’re not taxed 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 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 that 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. 

But 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.)

And withdrawals from a spousal RRSP can carry additional risks as well. Let’s say you’re making ongoing contributions to a spousal RRSP and your spouse withdraws funds. Depending on the timing, 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. So, it’s best to check with an advisor before making a withdrawal, to see how it may affect you.

An advisor can help you manage your finances and make the most of your investments. 


Connect with an advisor today.

3. You’ll permanently lose RRSP contribution room  

You can only put so much into your RRSP. So, once you take money out, you can’t replace the amount you had previously put into your registered savings 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 not to take money from your RRSP before you retire. It’s best to explore other options before you touch your RRSP. 

So, 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. (But 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),  segregated funds or savings bonds. 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. (Although, you’ll give up the potential investment earnings).

If you need to tap your non-registered savings, you may need to consider a few other factors:

  • 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. 
  • Do you want to know how much you’ll need to save for retirement? Try our Retirement savings calculator
  • 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.
  • Wondering where your money goes? Use our monthly budget calculator to find out.


Need help figuring out what’s right for you?

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

This article is meant to only provide general information. 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