With RRSP Withdrawal Tax, When you remove money from your RRSP before retirement, withholding tax is applied. For withdrawals up to $5,000, RRSP withholding tax is currently 10%; for withdrawals between $5,000 and $15,000, it is 20%; and for withdrawals exceeding $15,000, it is 30%.
The tax rate depends on how much you withdraw and where you reside. If you are a resident of Canada, the withholding rates are as follows (as of publication):
- 10% (5% in Quebec) on amounts up to $5,000
- 20% (10% in Quebec) on amounts over $5,000 up to including $15,000
- 30% (15% in Quebec) on amounts over $15,000
(Residents of Québec also pay a provincial sales tax of 15% in addition to the federal withholding tax. If you are a non-resident of Canada, you will pay a 25% withholding tax rate, regardless of the size of the withdrawal.
It’s also important to keep in mind that this won’t be the only time you’ll be taxed: The amount you withdraw will count as income, so you’ll have to declare it once you do your tax declaration for the year that you’ve withdrawn. If the withdrawal ends up putting you in a higher tax bracket, you’ll have to pay more income tax, since the withdrawal tax likely won’t cover the full amount of income tax you’ll owe. That’s why withdrawing prematurely from an RRSP should really be a last resort, after you’ve exhausted all other possible avenues.
When you withdraw from your RRSP, your financial institution will provide a T4RSP showing the amount you withdrew, and how much tax was withheld. You must declare this amount on your T1 General Income Tax Return in the calendar year you withdrew it. You can find the income tax rates for the current year on the Canada Revenue Agency (CRA) website.
Another important consideration: You don’t get your contribution room back. The Canada Revenue Agency only lets you count that contribution once—you can’t add back the amount of a withdrawal to existing contribution room. So if you take out $7,000, you won’t be able to add it back in later. That means you’ll decrease the amount of money in the account that would benefit from compounding.
How to avoid withholding tax when withdrawing RRSP funds
There are actually two exceptions where early withdrawals from an RRSP won’t incur withholding taxes. These are withdrawals made under the Home Buyers’ Plan (HBP) and/or the Lifelong Learning Plan (LLP).
The Home Buyers’ Plan is a program that allows you to withdraw up to $35,000 (tax-free) in a calendar year from your RRSP in order to buy or build a home. You have 15 years to pay the funds back, and repayments start the second year after you withdraw the funds. CRA will send you a statement each year with your HBP balance owing, payments made to date, and what the minimum payment amount is. In order to participate in this program, you’ll have to fulfill certain criteria, including demonstrating that you’re a first-time home buyer.
Participants in the Lifelong Learning Plan are allowed to withdraw up to $10,000 tax-free per calendar year from an RRSP, subject to a maximum combined total of $20,000 tax-free to finance full-time education or training for you, your spouse, or your common-law partner. You don’t have to withdraw the full amount at once, and can instead spread it out over four years, as long as you don’t exceed $20,000.
You have 10 years to pay back the funds. Starting year of repayment will depend on how long you remain a qualifying student after the first LLP withdrawal. CRA will send you an LLP notice each year with your LLP balance, payments made, and the amount of your next LLP payment. You still have to file income tax each year and designate your LLP repayment on Schedule 7.
Consequences of withdrawing RRSP money early
The biggest consequence of prematurely withdrawing RRSP funds early is certainly the tax penalties. Your tax bill can really suffer, especially if you withdraw a large amount, since in addition to the withdrawal taxes you’ll also be paying combined income tax.
But another huge consequence of withdrawing funds early? The simple truth is that you’re just robbing your future self of money you’ll need in retirement. An RRSP works its magic when longterm, steady contributions allow funds to grow thanks to the magic of compounding. Withdrawing funds is a huge setback for the progress of your retirement fund, especially since you won’t be able to recuperate the contribution room you’ve lost through early withdrawal.
Keep in mind that withdrawing multiple smaller amounts in a short period of time in an attempt to avoid the higher withholding tax comes with certain disadvantages as well. Your financial institution could still deduct the amount of withholding tax that would apply to the total amount. For example, if you want to withdraw $10,000 but you split it into four monthly withdrawals of $2,500 to avoid the 20% tax withholding rate, your financial institution could still withhold 20% on the last withdrawal if they notice the pattern. The point is: Withdrawals are generally not advisable and you should be exploring other possible avenues before you touch your RRSP.