RRSPs can be withdrawn from at any time (unless you have a locked-in plan), but there are some tax considerations to keep in mind. This is especially true as withdrawals count as income that needs to be declared on your tax return.
If you're thinking about withdrawing from your RRSP, our guide goes over all the rules to be aware of, as well as the best times to withdraw.
Let's take a close look at all you need to know about RRSP withdrawals.
Key Takeaways
- If you withdraw from your RRSP before or during retirement, you’ll be charged a withholding tax of up to 30%.
- The Home Buyers’ Plan and Lifelong Learning Plan allow for early tax-free RRSP withdrawals for specific purposes.
- Withdrawing from a spousal RRSP is the same as a regular RRSP with the exception of the 3 year attribution rule.
What happens when you withdraw from your RRSP early?
If you choose to make a lump sum withdrawal from your RRSP, here’s what could happen:
- Your financial institution will charge you withholding tax.
- You'll have to declare the withdrawal on your tax return for that year. What you paid immediately to the financial institution will count as taxes paid, but you may need to pay more income tax (or maybe even get a refund), depending on your tax situation.
- You’ll miss out on tax-deferred compounding that an RRSP provides. Taking out even a little bit of money means you're losing out on interest that amount could have earned in the future.
- You’ll lose RRSP contribution room. There is a limit to how much money you can add to your RRSP each year, and if you decide to withdraw funds in 2023 that you deposited in 2022, you won't get that extra room back to use another year.
What is RRSP withholding tax?
Withholding tax is what your bank takes off each paycheque that is passed along to the CRA. This happens when you make a lump sum withdrawal from your RRSP because the money will count as income.
But you won’t be subject to this tax in the following situations:
- You convert your RRSP to a Registered Retirement Income Fund (RRIF).
- You purchase an annuity.
- You use your RRSP funds to buy your first home.
- You use your RRSP funds to go to school.
The amount charged for withholding tax depends on the amount of money being withdrawn, and it varies a bit for Quebec residents. Here’s how much tax you can expect to pay:
| Withdrawal amount | Withholding tax amount (federal) | Withholding tax in Quebec (federal and provincial)* |
|---|---|---|
| Up to $5,000 | 10% | 20% |
| Between $5,000 and $15,000 | 20% | 25% |
| $15,000 and up | 30% | 30% |
* In Quebec, you pay a slightly lower federal withholding tax, but also pay an additional 15% in provincial tax. The amounts in the table show the total amount.
2 ways to withdraw tax-deferred from your RRSP before retirement
The 2 methods to withdraw from your RRSP early without taking any penalties are the Home Buyers' Plan and the Lifelong Learning Plan.
The Home Buyers’ Plan (HBP)
The Home Buyers' Plan is a government program for first-time home buyers that allows you to withdraw up to $35,000 of your RRSP savings to help pay for your first home.
As long as you’re the account owner and don’t exceed the $35,000 maximum, you can actually withdraw funds from more than one RRSP. However, there are some types of RRSPs that won’t allow this, such as locked-in RRSPs or group RRSPs.
The Lifelong Learning Plan (LLP)
The Lifelong Learning Plan provides Canadians with the opportunity to withdraw up to $10,000 per calendar year to use for yourself or your partner's full-time training or education. You're able to make use of this program more than once, but the total withdrawal limit is $20,000.
How to withdraw from your RRSP in retirement
There are 3 main options for making RRSP withdrawals once it reaches maturity:
- Make a lump sum withdrawal
- Purchase an annuity
- Convert it to an RRIF
Here's a comparison:
| Option | Pros | Cons | Learn more |
|---|---|---|---|
| Lump sum withdrawal | * Have all of your money at once * Can move the funds around as you please | * Subject to withholding tax * Significantly increases your income for taxes * Won’t earn interest unless you deposit it into another investment account | Registered pension plan (RPP) lump-sum payments |
| Annuity | * Provides guaranteed income for life (or a period of your specification) * No withholding tax * Pays more than an RRIF * No investment or management decisions required | * You’ll be taxed on each payment you receive * No changes are allowed to payment amounts or any other details once the payments begin | Annuities |
| Convert to RRIF | * No withholding tax on the transfer and your money continues to grow tax free * Provides a steady income * Can hold various types of investments * Continues to earn interest * Can make lump sum withdrawals as needed | * Can’t make contributions to the fund * Must adhere to CRA minimum withdrawal limits * You could outlive the RRIF income * Requires investment management | Registered Retirement Income Fund (RRIF) |
You can decide to withdraw a lump sum or convert the RRSP to an RRIF on your own, but if you choose to use an annuity, it’ll have to be purchased. Annuities can be bought from an insurance company or a licensed financial advisor.
How do spousal RRSP withdrawals work?
A spousal RRSP is a shared RRSP where one spouse is a contributor and one is an annuitant (usually the lower-earning partner and the one to withdraw funds).
Withdrawing money from a spousal RRSP is the same, save for the 3-year attribution rule. This states that once a contribution is made, no withdrawals can take place for the rest of the calendar year, nor can they happen for another 2 years afterwards.
The only exceptions are if the withdrawals are being made as part of the Home Buyers' Plan or Lifelong Learning Plan.
FAQ
What's the best way to withdraw money from an RRSP?
It depends on your situation, but the best way to withdraw from your RRSP may be converting it to an RRIF, which allows you to skip withholding tax on the transfer and continue earning tax free (though your payments are still taxable).
What are the rules about withdrawing from an RRSP?
The most important rule is that any RRSP withdrawals will result in withholding tax. However, there are programs that provide tax-free withdrawals before retirement. During retirement, you can convert your RRSP to an RRIF or an annuity to avoid withholding tax on the transfer.
Are there any spousal RRSP withdrawal rules?
The spousal RRSP withdrawal rules are similar to typical RRSPs, with one exception: the 3-year attribution rule. This means that once a contribution is made, no withdrawals can be made for the rest of that year and 2 years afterwards.
When can I withdraw my RRSP?
You can withdraw from your RRSP at any time, but you could be subject to withholding tax depending on your method, and you'll be required to report the withdrawal as income when filing your taxes.
What happens if you never withdraw from your RRSP?
If you never make an RRSP withdrawal, your contributions will remain tax-sheltered until you turn 71. In this case, you'll have to withdraw them, transfer them to an RRIF, or use them to purchase an annuity.
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