RRSP Withdrawals

When it comes to saving plans available to Canadians, there’s no other saving plan that’s as beneficial, but also as confusing, as the Registered Retirement Savings Plan or the RRSP.

When can you withdraw money from your RRSP and how much? Do you have to pay taxes on your RRSP fund withdrawals? If yes, how can I withdraw from an RRSP without paying tax? These might be just some of the questions in your mind. And you’re not the only one with these questions. According to a 2022 RRSP study by BMO, though the planned RRSP contributions have increased by 47% since 2020, the knowledge of the RRSP account’s features and benefits continues to falter.

Learning about RRSP withdrawals can feel like going down a rabbit hole because of the number of implications, terms, and conditions involved.

So let’s take a look at the rules, risks, and benefits of early RRSP withdrawals, as well as details about RRSP withdrawals at retirement. This article will provide you with the information you need to make informed choices about your financial future with regards to RRSP.

RRSP Withdrawals Canada: Can you withdraw your RRSP funds before retirement?

While RRSPs are designed to help you save for retirement, we know life can be unpredictable and there may be times when you need to withdraw funds from your RRSP account earlier than expected.

It’s possible to withdraw from your RRSP before retirement age as long as you’re not investing in a locked-in RRSP or a Locked In Retirement Account (LIRA). But, there’s a catch: This type of withdrawal can come with tax implications and penalties. Not to mention, it can also affect your long-term retirement goals. Let’s dive deeper into RRSP withdrawals before retirement and what you need to know before making any decisions.

How much tax will you pay on early RRSP withdrawals?

You can withdraw from your RRSP before retirement age, but you will be subject to a withholding tax of up to 30%, depending on the amount you withdraw. Here’s what the specific tax implications look like for residents in Canada (except for those in Quebec) according to the Canada Revenue Agency (CRA):

But…there’s a silver lining: There are certain situations when you can withdraw funds from your RRSP tax-free.

How do you withdraw from an RRSP without paying tax?

The Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP), subject to certain conditions, are the two plans that allow you to make tax-free RRSP withdrawals.

The HBP allows you to withdraw funds from your RRSP to buy or build a qualifying home for yourself or for a related person with a disability. Currently, the RRSP withdrawal limit under the HBP plan is $35,000. Here are the eligibility criteria you need to meet to make an RRSP withdrawal under the HBP:

• Be considered a first-time home buyer

• Must be a resident of Canada

• Have a written agreement to build or buy a qualifying home

• Intend to occupy the qualifying home as your principal place of residence within one year after buying or building it

The exception to the list above is the first-time home buyer clause. It is possible to take money from your RRSP a second time but you must repay the previous HBP balance and wait four years. For more details about withdrawing your RRSP funds for the second time under the HBP, check out this informative article from Koho.

Coming to the Lifelong Learning Plan or the LLP: The RRSP withdrawal limit under the LLP is up to $10,000 in a calendar year. This can be used to finance full-time training or education for you or your spouse/common law partner. In order to qualify for a tax-free RRSP withdrawal under the LLP, you or your spouse/common law partner need to meet all of the following conditions:

• Have an RRSP account

• Are a resident of Canada

• Are enrolled (or have an offer to enrol before March of the following year) as a full-time student in a qualifying educational program at a designated educational institution

For further information on the eligibility criteria for RRSP withdrawals under the LLP, check out the CRA website.

An important thing to note when withdrawing from your RRSPs under either of these plans is to not include them as income on your income tax return.

Withdrawing RRSP money at retirement

The official maturity of your RRSP plan aka your “retirement” occurs on the last day of the calendar year in which you turn 71. After that, you’re required to close your RRSP account and can exercise any of the following options for your RRSP money:

1. Convert your RRSP into RRIF or the Registered Retirement Income Fund

Why this option? Because it gives you a steady source of retirement income where you need to withdraw at least a set minimum amount annually. You won’t have to pay any withholding tax on the withdrawal of this minimum amount from your RRIF, but you will need to pay a withdrawal tax if you exceed that amount.

1. Withdraw a lump sum amount from your RRSP account

Choosing this option ensures you have access to all your RRSP funds right away, but it comes at the cost of a withholding tax. Also, you need to add the RRSP withdrawal amount to your income when filing your taxes.

1. Convert your RRSP to an annuity

Your RRSP funds can be used to purchase an annuity for life or for a specified time frame. You don’t have to pay any withholding tax on the RRSP amount you use to buy an annuity but you may have to pay tax on the income once you start receiving payments from the annuity plan. It does come at a steep cost though: Annuities are not cheap, especially when compared to other investment options such as mutual funds. Also, if you don’t live long enough to reap the benefits of the annuity, it’s essentially money down the drain.

What happens if you never withdraw from your RRSP?

As tempting as it is to withdraw funds from your RRSP prior to retirement, not doing so will save you a lot of money as any income earned from RRSP withdrawals is considered taxable income. But when you turn 71, it’s mandatory for you to withdraw your RRSP funds and close your RRSP account.