RRSP Withdrawals and Their Tax Impacts

What You Should Know About RRSP Withdrawals

You can withdraw from your registered retirement savings plan at any time, but withdrawals made before you turn 71 can lead to significant penalties.

You can withdraw funds from your registered retirement savings plan at any time, but most withdrawals are subject to withholding tax — and the amount is added to your taxable income.

Funding a registered retirement savings plan (RRSP) is a solid option when you’re preparing for retirement.

But after years of contributing to your RRSP, you might start to think about withdrawing some or all of that money, possibly before your RRSP matures.

It’s important to understand how RRSP withdrawals work, because depending on how you access your money, you could wind up paying a steep withholding tax — a cost we’re happy to help you avoid if possible.

When can you withdraw money from an RRSP?

You can make a withdrawal from your RRSP at any time so long as you’re not investing in a locked-in RRSP – also called a locked-in retirement account, or LIRA — which can only be used for retirement income unless you meet certain conditions.

Your RRSP matures on the last day of the year you turn 71, at which point you’ll need to choose one of three options, which have different tax implications:

Withdraw the funds as a lump sum.
Transfer the funds to a registered retirement income fund, or RRIF.
Buy an annuity.

If you’re in a tough financial situation, you may need to access your RRSP funds. However, lump-sum RRSP withdrawals are subject to a withholding tax and must be counted as taxable income in the year you make the withdrawal.

Withdrawing funds from your RRSP before you turn 71 also means you’ll miss out on the compound interest that could have continued to accumulate. You don’t get to make up those contribution room as you would in a tax-free savings account, or TFSA in the following year.

If you’re considering withdrawing funds for a home purchase or education, you may be able to avoid some of these drawbacks — and make the most of your RRSP benefits.

How much tax will you pay on RRSP withdrawals?

The amount of withholding tax you pay on lump-sum RRSP withdrawals is the same whether you wait until age 71 or not. The RRSP withholding tax rate depends on the province where you reside and the amount you take out. The current tax rates on RRSP withdrawals are:

10% on withdrawals up to $5,000 (5% in Quebec).
20% on withdrawals between $5,000 and $15,000 (10% in Quebec).
25% on withdrawals of any amount for non-residents of Canada.
30% on withdrawals over $15,000 (15% in Quebec).

The money you withdraw from your RRSP will be added to your taxable income for the year, which could lead to a higher tax bill.

» See our picks:The best high-interest RRSPs in Canada

Avoiding taxes on your RRSP withdrawals

Because of the withholding tax and the loss of contribution room, lump-sum RRSP withdrawals are not typically a good first option to access funds. However, two programs allow you to withdraw money from your RRSP without facing these consequences:

If you’re eligible for the Home Buyers’ Plan (HBP), you can withdraw up to $35,000 from your RRSP to put toward the purchase of your first home. And if you are buying the home with a partner, you can both take advantage of the HBP and withdraw a total of $70,000 to use as a down payment.
If you’re eligible for the Lifelong Learning Plan (LLP), you can withdraw a maximum of $20,000 (up to $10,000 per year) from your RRSP and put it toward training or education for yourself and/or a partner or spouse at a recognized educational institution.

The catch with both programs is that the money you withdraw from your RRSP has to be returned, so it’s more like an interest-free loan to yourself than a true withdrawal. You’ll have 15 years to replenish the funds used for the HBP and 10 years for those used for the LLP.

Another general strategy for avoiding heavy taxes on RRSP withdrawals is to let your plan mature, at which point you’ll have more options. Once you turn 71, you can transfer RRSP funds to an RRIF. The income you receive from your RRIF will be taxable, but you won’t have to pay the withholding tax. Another option that also avoids the withholding tax is to use your RRSP money to buy an annuity.

If there’s a portion of your retirement savings that you want to keep accessible, consider putting those funds into a TFSA instead. Important differences between TFSAs and RRSPs include:

You can make unlimited withdrawals from a TFSA without incurring any tax penalties.
The amount you withdraw will be added to your contribution room at the start of the next year.
Any gains realized by the investments held in a TFSA are completely tax-free.

Unless you’re using some of your RRSP funds to buy a home through the Home Buyers Plan or for education, under the Lifelong Learning Plan, you’ll have to pay a withholding tax when you withdraw from your RRSP. The amount you withdraw will also be added to your taxable income for the year. To avoid the withholding tax, you can let your RRSP mature and transfer it to a RRIF when you’re 71.

When you withdraw from your RRSP, your financial institution will withhold an additional amount, known as a withholding tax, and remit it to the government. The withholding tax rate depends on the amount you withdraw and your province of residence. You’ll receive a T4 RRSP form that details the amount you withdrew during the year and the tax deducted. You’ll report these amounts on lines 12900 and 43700, respectively, of your income tax return for the year the withdrawals were made.