RRSP Withdrawal Rules: What You Need To Know

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If you’re saving for your retirement, the odds are that you’re using your Registered Retirement Savings Plan (RRSP). This is an excellent tool to save money, but eventually, you’ll need to withdraw your funds. Knowing what the RRSP withdrawal rules are is vital since there will be tax consequences depending on when and how you withdraw your funds.

What is an RRSP?

To quickly summarize, an RRSP is a type of registered account that is used for retirement savings in Canada. For every dollar you contribute, your taxable income is reduced by an equal amount. 

Once your money is in your account, you can purchase investment products such as mutual fundsexchange-traded funds, stocks, bonds, guaranteed investment certificates, and more.

Any capital gains or interest earned within the account is completely tax-free. However, when you eventually withdraw the money from your account, you’ll pay tax at your marginal tax rate (provincial taxes + federal taxes). The assumption is that you’ll be in a lower tax bracket when you retire, so you’ll pay fewer taxes overall.

RRSP contribution room is calculated at 18% of your previous year’s income, up to a yearly maximum. Any unused RRSP contribution space gets carried forward indefinitely.

RRSP withdrawal rules at 71

All RRSPs reach maturity on December 31 of the calendar year you turn 71. At this time, any resident of Canada with an RRSP must decide between three options. Each option has different tax rules to be aware of. 

Convert your RRSP to a RIFF

RRSP withdrawal rules at 71 starts with you converting your RRSP to a Registered Retirement Income Fund (RRIF). This is a simple process, but note that once you’ve converted to a RRIF, there’s a minimum amount that you must withdraw each year. 

These minimum withdrawals are subject to withholding and income tax. Like a regular taxpayer, if you’ve overpaid, you’ll get your money back when you file your taxes. 

Purchase an annuity

Although not as popular, you can convert your RRSP to an annuity. This would give you a guaranteed income for life or a specific period. You won’t pay any taxes when purchasing the annuity, but you would get taxed on any income you get paid.

Once you pass away, the payments obviously stop. In most cases, that’s the end of the funds. However, there are some annuities you can purchase that include a beneficiary clause.

Take out all your cash

Technically speaking, you could withdraw all of your money from your RRSP. The problem is you’d be subject to your withholding tax rate, and the entire amount is taxable. The highest income bracket in Canada is over 50%, so you could pay a lot of taxes if you go this route.

RRSP early withdrawal penalty

RRSP withdrawal rules come with potential penalties. You can access the funds within your RRSP at any time, but you’d face an RRSP early withdrawal penalty. This is known as a withholding tax and would be applied by the financial institution where your RRSP is being held. 

The current tax rates on RRSP withdrawals are:

  • Up to $5,000 withdrawn – 10% (5% in Quebec)
  • $5,001 to $15,000 withdrawn – (10% in Quebec)
  • $15,001+ withdrawn (15% in Quebec)

Non-residents of Canada must pay a flat withholding tax rate of 25% on any withdrawals. Also, note the other part of the RRSP early withdrawal penalty is the permanent loss of the contribution amount. In other words, if you withdraw any amount without a qualifying reason, you lose that RRSP space forever.

How to make RRSP withdrawals without paying taxes

There are a few situations where you can make RRSP withdrawals without paying taxes. That said, each method has its own rules and may require repayments. Fortunately, each method is for a specific reason, so it can benefit you in multiple situations.

Home Buyers’ Plan

The Home Buyers’ Plan (HBP) allows you and your spouse or common-law partner to withdraw up to $35,000 each from your RRSPs to be used as a down payment on your first home.  The Canada Revenue Agency (CRA) won’t charge the withholding tax when using HBP, so you’ll get the full $35,000 whenever needed.

The HBP does need to be repaid over fifteen years. Payments start two years after you withdraw the funds, and the minimum payment is 1/15 of what you withdrew. For example, if you withdrew $30,000 in 2023, you’d have to repay at least $2,000 every year, starting in 2025. You’d simply mark this as a repayment on your tax return. You do not get an additional tax deduction when making repayments.

Lifelong Learning Plan

The Lifelong Learning Plan (LLP) allows you to withdraw up to $10,000 annually, up to a lifetime maximum of $20,000. You must be pursuing a full-time education (part-time if you have a disability) at a qualifying post-secondary educational institute to access the LLP.

Similar to the HBP, there are no withholding taxes for the LLP. You only get 10 years to repay the LLP. Payments start the second year in which you no longer qualify for the LLP (usually when you’re no longer a student). Repayments would be 1/10 of what you withdrew.

Transfer to the Tax-Free First Home Savings Account

The Tax-Free First Home Savings Account (FHSA) is expected to become available in April of 2023. At that time, you can contribute up to $40,000 ($8,000 per year) into the account to be used to purchase your first home. The FHSA is basically an upgrade of the HBP. The major advantage is you get the benefits of an RRSP and Tax-Free Savings Account (TFSA) combined.

The RRSP withdrawal rules state that you can transfer funds from your FHSA to your RRSP tax-free. Contribution limits still apply, and you would not get an additional tax break.

The basic personal amount 

Every current tax year, the government gives taxpayers a basic personal amount (BPA). No taxes are required until you reach this amount. For example, for the 2022 tax year, the federal BPA was $14,398. In addition, there’s a provincial version. The BPA in Ontario for 2022 was $11,141. That means residents of Ontario would have a combined BPA of $25,539 for 2022.

Let’s say you have a year where you’ll be making no or low income (such as maternity leave). You could withdraw funds from your RRSP to give yourself income. Although withholding taxes would apply, you would get your money back when you file your tax return. Note that you would permanently lose the contribution space on any funds withdrawn. This is a little-known trick that can help Canadian residents that need income badly.

Spousal RRSP withdrawls

Spousal RRSP withdrawal rules are similar to a regular RRSP, but they’re a little different due to the way the account is set up. Withdrawals can only be made by the annuitant. You’d also have to convert to a spousal RRIF by the end of the current year in which you turn 71 (or one of the other options listed above).

It’s worth mentioning that any spousal RRSP contribution must stay in the account for the remaining calendar year plus two more years. Once that time has passed, the funds can be withdrawn and taxed accordingly under the annuitant. If you were to withdraw the funds before that timeline, the contributor would be taxed on the withdrawal. This is known as the attribution rule.

How much tax you’ll pay on RRSP withdrawals

In the end, RRSP or RRIF withdrawals count as taxable income. The amount you’ll pay depends on your marginal tax rate. If you have a high income even in your retirement years, you’ll pay more taxes than someone that’s earning a lower income.

One thing that worries people is that their RRSP withdrawals may affect their Old Age Security (OAS) payments. That’s because if you have a high income, your OAS will see a clawback. I wouldn’t worry too much about this since earning too much money in your retirement years is not a bad thing. Note that there is no Canadian Pension Plan (CPP) clawback based on income.

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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