Can You Withdraw From an RRSP and How Does It Work?

A Registered Retirement Savings Plan (RRSP) is a personal savings plan established to help individuals save for retirement. It is a financial tool registered with the Canadian government, designed to allow contributions to grow on a tax-deferred basis. Contributions made to an RRSP are typically tax-deductible, which means they can reduce an individual’s taxable income in the year they are made. The funds remain tax-sheltered until they are eventually withdrawn from the plan.

Understanding General RRSP Withdrawals

Individuals can generally withdraw funds from an RRSP at any time, provided the funds are not in a locked-in plan. These regular withdrawals are considered taxable income and must be included in the individual’s income for the year they are received.

Financial institutions are required to withhold a portion of the withdrawal amount as a prepayment of income tax, known as withholding tax. For Canadian residents outside Quebec, the withholding tax rate is 10% on amounts up to $5,000, 20% on amounts over $5,000 up to and including $15,000, and 30% on amounts exceeding $15,000. For residents of Quebec, the rates are 5% on amounts up to $5,000, 10% on amounts over $5,000 up to and including $15,000, and 15% on amounts over $15,000, with an additional provincial tax. This withheld amount is not the final tax owed but rather a prepayment, which is applied against the individual’s total tax liability when they file their annual income tax return.

A significant aspect of regular RRSP withdrawals is that the contribution room used for the withdrawn amount is not reinstated. This means that once funds are removed from the RRSP, the ability to contribute that specific amount back into the plan for future tax deferral is permanently lost. This permanent loss of contribution room can impact long-term retirement savings strategies.

Special RRSP Withdrawal Programs

Certain government programs allow for tax-free or tax-deferred withdrawals from an RRSP under specific conditions. These programs require repayment of withdrawn amounts according to program rules.

Home Buyers’ Plan (HBP)

The Home Buyers’ Plan (HBP) enables eligible individuals to withdraw funds from their RRSPs to purchase or build a qualifying home. This program is primarily intended for first-time home buyers. The property must become the individual’s principal residence within one year of buying or building it.

The maximum amount that can be withdrawn under the HBP is $60,000 per individual. If an individual’s spouse or common-law partner also participates, they can each withdraw up to $60,000, totaling $120,000 for a couple.

The funds withdrawn under the HBP must be repaid to the RRSP over a period of up to 15 years. If the amounts are not repaid on time, the missed repayment becomes taxable income in that year. Successfully repaid HBP withdrawals do not affect the individual’s RRSP contribution room.

Lifelong Learning Plan (LLP)

The Lifelong Learning Plan (LLP) allows individuals to withdraw funds from their RRSPs to finance full-time education or training for themselves or their spouse or common-law partner. Eligibility requires enrollment in a qualifying educational program at a designated educational institution.

Under the LLP, an individual can withdraw up to $10,000 per calendar year, with a maximum total withdrawal limit of $20,000. These withdrawals are not subject to immediate taxation, provided they are repaid to the RRSP within a specified timeframe.

The repayment period for LLP withdrawals is generally 10 years. Similar to the HBP, any amounts not repaid by the due date will be included as taxable income in the year they were due. Repaying LLP withdrawals on time ensures that the original RRSP contribution room is not permanently lost.

The RRSP Withdrawal Process

Initiating a withdrawal from an RRSP involves specific steps to ensure the request is processed correctly by the financial institution. The process begins with gathering necessary information and completing the appropriate forms.

Individuals should identify the exact amount needed and the reason for the withdrawal, specifying if it’s for a special program like the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP). Necessary personal details, such as the RRSP account number and preferred method for receiving funds (e.g., direct deposit or cheque), must be readily available.

Financial institutions typically provide specific forms, such as a “RRSP Withdrawal Request Form” or specialized “HBP/LLP Withdrawal Request Forms,” which can be obtained from their website, customer service, or in person. These forms require completion of informational fields including personal identification, account details, the withdrawal amount, and the specific type of withdrawal being requested.

Forms can often be submitted through various channels, including secure online portals, by mail, or by delivering them in person to a financial institution branch. After submission, the financial institution will typically provide a confirmation of receipt. The processing time for withdrawals can vary but generally ranges from a few business days to a week. Upon successful processing, the funds are disbursed according to the chosen method.

In the subsequent tax year, the financial institution will issue a T4RSP slip, which is a tax document reporting the total amount of the withdrawal and any withholding tax that was applied. This slip is essential for filing the individual’s annual income tax return.

Maturity and De-registration of an RRSP

An RRSP must mature by the end of the calendar year in which the plan holder turns 71 years old. At this point, the individual has several options for managing the accumulated funds, each with distinct tax implications.

One common option is to convert the RRSP into a Registered Retirement Income Fund (RRIF). A RRIF allows the funds to continue growing on a tax-deferred basis, similar to an RRSP, but it mandates minimum annual withdrawals starting the year after conversion. These minimum withdrawals are included as taxable income in the year they are received, though they are not subject to withholding tax. Any amounts withdrawn above the minimum are subject to withholding tax.

Another option is to use the RRSP funds to purchase an annuity. An annuity converts the accumulated savings into a guaranteed stream of income payments for a set period or for life. Payments received from a registered annuity are fully taxable as income in the year they are received.

A third option is to make a lump-sum withdrawal of the entire RRSP balance. The entire amount is considered taxable income in the year of withdrawal and is subject to withholding tax. This can result in a substantial tax bill, potentially pushing the individual into a higher tax bracket.

It is important to select one of these options before the maturity deadline. Failing to do so can result in the entire RRSP being deemed de-registered, meaning the full fair market value of the plan becomes taxable income in that year, subject to withholding tax, which can lead to a significant tax liability.