How to Minimize Taxes on RRSP

Minimize taxes on RSSP

A Registered Retirement Savings Plan (RRSP) can represent a key source of future retirement income for many people in Canada.

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?

While Registered Retirement Savings Plans (RRSPs) are undoubtedly a popular retirement savings tool, many people use them as if they were regular savings accounts. A huge number of Canadians withdraw money from their RRSP before they retire, and many of those people don’t expect to put back what they took out (and this also reduces their total contribution room).

However, there are considerable financial repercussions when doing this, the main one being the tax consequences.

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.

Is There a Withholding Tax on RRSP Withdrawal?

Normally, when you make RRSP withdrawals, taxes are withheld at source, (these are known as withholding taxes). These are essentially an estimate and prepayment of the income taxes you may owe when you eventually file your income tax returns.

The amount of RRSP withholding tax you’ll pay will depend on how much money you take out.


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.

How Much Income Tax Do You Pay on RRSP Withdrawals?

RRSP withholding tax isn’t the only payment you might have to make. The gross amount that you withdraw from your RRSP is included in your income for the year, so you may have to pay even more in income tax when it comes time to file your taxes. The exact amount will depend upon your tax rate and your total taxable income for the tax year (which includes your RRSP withdrawal amount).

How Can I Avoid Withholding Tax when Withdrawing RRSP Funds?

Sorry, you usually can’t avoid paying this tax. Some people try withdrawing multiple smaller amounts in a short period in an attempt to avoid the higher withholding tax, but your financial institution could still deduct the amount of withholding tax that would apply to the total amount.

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 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). These programs allow you to withdraw money from your RRSP without facing tax 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. 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.

What Are The Consequences of Withdrawing RRSP Money Early?

The biggest consequence of prematurely withdrawing RRSP funds early is certainly the tax penalties. Your tax bill can suffer, especially if you withdraw a large amount, since in addition to the withdrawal taxes, you’ll also be paying more in income taxes

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 long-term, steady contributions allow funds to grow over many years 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.

Start by Discussing Your RRSP Withdrawal Options

Your accountants in Toronto at Filing Taxes will be able to go through all the possible options for funding that will prevent you from having to withdraw from your RRSP early and therefore paying RRSP withholding tax. It’s important to discuss RRSP withdrawal rules before you withdraw anything from your RRSP, so Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.


Frequently Asked Questions About RRSP Withdrawals

How can I withdraw from my RRSP without paying taxes?

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 an RRIF when you’re 71.

What happens when I withdraw from an RRSP?

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.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.



Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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