Though mostly used to prepare for retirement, Canadians can use their RRSP account and withdraw money from it at any time.
It is possible to withdraw funds from your RRSP a for some major life events. For example, if you are going back to school or buying a property.
There are very few RRSP withdrawal rules, however, beware of taxes on RRSP withdrawals. If you decide to withdraw money from your RRSP account, the amount as well as its interest will be taxed in the year of the withdrawal. Your bank will deduct a percentage directly from the amount you withdraw. Additionally, the amount you withdraw will have to be declared as income.
GOOD TO KNOW
Withdrawals from an RRSP to take advantage of the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP) may be tax-exempt, provided they are repaid to an RRSP in equal annual installments over a specified period of time.
Here is an example of the RRSP withdrawal rates based on the amount withdrawn from your RRSP account:
| Amount | RRSP Withdrawal Tax Rate |
|---|---|
| Up to $5,000 | 10% (5% in Quebec) |
| Between $5,000 and $15,000 | 20% (0 – 10% in Quebec) |
| More than $15,000 | 30% (15% in Quebec) |
RRSP Withdrawal Tax Rate Percentage Chart – RRSP Withdrawal Tax
The tax on an RRSP withdrawal is proportional to the amount withdrawn.
GOOD TO KNOW
This is why experts advise against withdrawing money from your RRSP before you retire. Though there is no withdrawal penalty, in addition to exposing you to high tax rates, it prevents you from accumulating capital without any tax constraints.
How do I make a withdrawal from an RRSP account?
If you decide to withdraw money from your RRSP, how do you proceed? Your banking institution will take care of withdrawing money from your RRSP, but before doing so, you must prepare yourself and ask the right questions. Such as, for example, what will your life cost once you retire?
GOOD TO KNOW
The more information you provide about your plans and goals once your RRSP account is disbursed, the easier it will be to adopt a precise plan that will allow you to enjoy your retirement.
Finally, remember to bring the important papers that your advisor will ask you for:
- income tax return
- notice of assessment
- pension funds
- statements on your investments.
How to withdraw your RRSP without paying tax?
Although not at all recommended by experts and advisors, it is possible for any RRSP account holder to withdraw funds from his or her account before retirement.
There are several circumstances where disbursement of the RRSP is encouraged even if it is premature in relation to your retirement:
Home Buyers’ Plan (HBP)
If you wish to acquire a property, have not become a homeowner in the last five years, and will repay the amount within 15 years of the withdrawal, you can withdraw up to $25,000 from your RRSP. This amount will not be taxable and will allow you to have a larger down payment on a property.
Lifelong Learning Plan
If you or your spouse plans to go back to school, you can withdraw up to $10,000 per year from your RRSP for four years to help pay for the cost of schooling.
Other reasons to consider withdrawing from your RRSP
To have a better record when applying for a mortgage refinancing
If you have a high level of debt and no source of funds to draw from, it is recommended that you use your RRSP to get rid of your debts and improve your credit rating, which will allow you to obtain a mortgage refinancing.
Getting out of a vicious circle of endless debt
Although it is a last resort, you should not underestimate the possibility of using part of your RRSP to get out of a debt circle.
To have an alternative to debt for a year with no or low income
If you experience a job loss or are taking a sabbatical year it might be recommended to dip into money in your RRSP to make up for the income loss rather than going into debt. Since your tax rate will be low, the tax impact of the withdrawal will be less.
Tips for withdrawing from your RRSP
There are many different strategies for making a withdrawal, but most agree on certain points. Here are some strategic tips to consider if you are thinking of withdrawing from your RRSP:
Disburse your RRSP last
First, dip into your bonds, savings account, and preferred shares, in short, all the income on which you were taxed each year. You can then access your TFSA account, tax-free. At the end, when the time is right or as a last resort, touch your RRSP account.
Don’t withdraw from your RRSP until you’re older
Or at least do it very slowly since withdrawing your RRSP before age 71 will cause you to lose tax-sheltered capital growth. So if this happens to you, take the time to do it over a period of time, as long as possible and preferably when all your other sources of income have diminished.
Switch from RRSP to RRIF account
Once you turn 71, convert your RRSP account to an RRIF: Registered Retirement Income Fund.