RRSP Withdrawal Rules: All You Need to Know

How do I withdraw money from an RRSP?

Withdrawing money from your RRSP is fairly straightforward. The funds held inside your RRSP can be invested in a variety of ways: cash, GICs, mutual funds, ETFs, individual stocks, bonds, and more. Accessing the money might require turning the investments into cash (often by selling the security) and then withdrawing the cash into your bank account.

So if you want to withdraw from your RRSP, you can usually transfer the funds online from your RRSP into your bank account or call up your financial institution and request a withdrawal from your RRSP. 

Sounds simple, right? Well, it might not be as straightforward as it seems. 

Let’s say you decide to dip into your RRSP before retirement. Here’s the catch: you’ll have to report it when you file your income tax. And that’s not all—your financial institution will hold back a chunk of the money you withdraw as a withholding tax. Plus, there’s a chance you’ll owe more income tax by the end of the year if the amount you take pushes you into a higher tax bracket. So, my friend, be careful and keep reading for all the nitty-gritty details.

When can I withdraw money from my RRSP?

Anytime you want—you’re in charge! You can withdraw from your RRSP at any time, including withdrawing small amounts or the entire balance. You can also purchase an annuity or transfer your RRSP funds into a RRIF at anytime, but you will be required to do this by the end of the year you turn 71.

Just know that you’ll have pay tax on any RRSP withdrawals (10% on withdrawals up to $5,000, 20% on withdrawals above $5,000 and up to $15,000, and 30% for withdrawals above $15,000).

While the funds in your RRSP are primarily meant for retirement savings, there are situations when it makes sense to withdraw from your RRSP before retirement. 

For example, RRSP funds may also be withdrawn and used for the Lifelong Learning Plan (LLP) and the Home Buyers’ Plan (HBP). (More on these two programs coming up.)

How does an RRSP withdrawal affect my contribution room?

RRSP withdrawals don’t impact your RRSP deduction limit (also referred to as contribution room). Unlike withdrawals from a TFSA, withdrawing from your RRSP does not re-open contribution room; remember, after all, you saved tax from the deduction on your return when you made the contribution. (Not sure you made the deduction? Our Tax Experts can help you with that.).

Check your Notice of Assessment (NOA) for the official RRSP deduction limit, or log into your CRA account to check your limit.

Do you have to pay back RRSP withdrawals?

You don’t have to pay back RRSP withdrawals, but if you withdrew from your RRSP to participate in the Lifelong Learning Plan (LLP) or the Home Buyers’ Plan (HBP), then there’s a payback schedule to follow to replace the borrowed funds (up to 15 years for the HBP and up to 10 years for the LLP).

Once you dip into your RRSP and take some cash out under the HBP or LLP, a repayment period kicks in. Your repayment period starts in the second year after the year when you first withdrew funds from your RRSP. Think of it as giving yourself a loan.

Not sure how much you have to repay each year? Look to your NOA, the HBP/LLP section will remind you of the outstanding balance and the minimum repayment required each year. But what if money is tight, and you’re not sure you can make an RRSP contribution? No worries. In this case, the minimum repayment amount is added to your income. You’ll have a small amount of tax to pay on it, but it doesn’t change next year’s repayment amount and it’s still used to reduce the outstanding balance. 

Just make sure you stay on top of payments to avoid any surprises come tax time!

How are RRSP withdrawals taxed?

Once you pull funds out of your RRSP, the withdrawal becomes fully taxable. 

So at tax time, the amount you withdrew from your RRSP will get added to your taxable income for that year. This means the CRA will be knocking on your door, asking for its cut of the cash. (Keep in mind your financial institution also withholds some taxes up front when you withdraw from your RRSP before age 71).

If you make an RRSP withdrawal before retirement, the withdrawal might kick you into a higher tax bracket…which means you may have a bigger tax bill for that year. But this depends on your income.

For example, let’s say you live in Ontario and earn $95,000 in salary. You want to withdraw $15,000 from your RRSP to pay off some credit card debt. The $15,000 would be added to your income—pushing your total taxable income up to $110,000.

With your annual salary of $95,000, you reached a tax rate of 31.48%, meaning at least this rate of income tax needs to be payed on your RRSP withdrawal. However, with our marginal tax rate system, you will owe a little more as an additional $15,000 means slightly higher tax rates will be applied to some of that income. 

That said, if you withdraw from your RRSP under the Home Buyers’ Plan or Lifelong Learning Plan you won’t pay any tax on those withdrawals (see the payback schedule mentioned above).

What is RRSP withholding tax?

When withdrawing from your RRSP before it matures (age 71), the financial institution automatically puts aside a percentage for taxes. The rate of tax depends on how much you withdraw:

• 10% is held back for withdrawals up to $5,000.
• 20% is held back for withdrawals between $5,000 and $15,000.
• 30% is back for withdrawals over $15,000.

So if you need a total of $10,000 (net), then you’ll have to withdraw $12,500 from your RRSP. That’s because your financial institution will withhold 20% for taxes, leaving you with $10,000 in your bank account.

How to withdraw money from an RRSP without paying tax?

You can’t. The only way to withdraw funds from your RRSP without paying taxes is to use the funds to buy a home as part of the Home Buyers’ Plan or to pay for your own or partner’s education as part of the Lifelong Learning Plan. 

Funds withdrawn under these two programs are not subject to taxes if you repay the funds within the required timelines. But it’s not a free ride: if you don’t repay the funds, you’ll owe taxes on the annual minimum repayment amount.

How to withdraw money from a spousal RRSP?

A spousal RRSP offers an income splitting opportunity whereby a spouse with a higher income can contribute to an RRSP in the lower-income spouse’s name. The funds can then be withdrawn by the spouse earning less money, with the advantage of reducing your overall household taxes.

Keep in mind, though, you must wait two full calendar years, with no contributions, before you can make a withdrawal from a spousal RRSP to avoid the income being included in the contributor’s income for the year.

RRSP withdrawals: a key part of your retirement plan

So, there you have it! The RRSP is an awesome savings tool to help you reduce your tax bill and save for retirement. But it can also help you buy your first home, pay for your education, or top-up your income if you’ve lost your job. There’s no penalty for accessing your RRSP funds early other than paying taxes on the amount withdrawn.

If understanding the ins and outs of RRSP withdrawals seems overwhelming at first, don’t stress too much—there’s no one-size-fits-all approach to retirement planning, and everyone’s situation is unique. The goal is to have a comfortable retirement, and that means making strategic financial decisions throughout your lifetime. Doing so will ensure you’re well on your way to a bright financial future.