How to Withdraw Money from Your RRSP

A Registered Retirement Savings Plan (RRSP) helps Canadians save for retirement with tax-deferred investment growth. While designed for long-term savings, withdrawing funds before retirement may be necessary. Understanding the process and consequences is important. This guide covers RRSP withdrawal types, tax implications, and procedural steps.

Understanding Different Types of RRSP Withdrawals

RRSP withdrawals before retirement fall into a few categories. A regular withdrawal removes funds from the plan. These withdrawals are taxable and result in a permanent loss of RRSP contribution room, meaning the amount cannot be re-contributed without available room.

The Canadian government also offers programs for tax-free withdrawals, provided funds are repaid. These include the Home Buyer’s Plan (HBP) and the Lifelong Learning Plan (LLP), which are essentially interest-free loans from your RRSP designed to help individuals achieve significant life goals without immediate tax penalties.

The HBP allows eligible individuals to withdraw up to $60,000 to purchase or build a qualifying home. You must generally be a first-time homebuyer. Repayment to your RRSP is required over a maximum of 15 years, starting in the second calendar year after withdrawal.

The LLP allows withdrawals to finance full-time education or training for yourself or your spouse or common-law partner. You can withdraw up to $10,000 per calendar year, with a maximum total of $20,000. Enrollment in a qualifying educational program at a designated institution is required. Repayment is over a period of up to 10 years, beginning in the fifth year after your first withdrawal.

Tax Implications of RRSP Withdrawals

Regular RRSP withdrawals have significant tax consequences. The entire amount is considered taxable income, which can push you into a higher tax bracket and increase your overall tax liability.

Financial institutions deduct a withholding tax from your RRSP withdrawal. This is an upfront payment towards your income tax, but it is an estimate and not necessarily the final tax amount. Federal withholding tax rates vary based on the withdrawal amount: 10% for withdrawals up to $5,000, 20% for amounts between $5,000 and $15,000, and 30% for withdrawals exceeding $15,000.

Provincial withholding tax rates may also apply, particularly in Quebec, where separate provincial rates are deducted. The total tax withheld might not fully cover your final tax obligation, especially if the withdrawal significantly increases your taxable income. You might owe additional tax when you file your annual income tax return.

After a withdrawal, your financial institution will issue a T4RSP Statement of RRSP Income slip. This slip details the gross amount of your withdrawal and the total income tax withheld. You must report this information on your annual income tax return. The tax withheld will be credited against your total tax payable.

HBP or LLP withdrawals are not subject to immediate taxation or withholding tax, provided they meet the program’s conditions. However, if you fail to repay the required annual amount to your RRSP within the stipulated repayment period, the missed portion will be added to your taxable income for that year.

Steps to Initiate an RRSP Withdrawal

Initiating an RRSP withdrawal involves several procedural steps. First, contact the financial institution where your RRSP is held. They are the administrators of your plan and will guide you through their specific withdrawal process.

Next, clearly determine the type of withdrawal you intend to make, whether it is a regular cash withdrawal, or a specialized withdrawal under the Home Buyer’s Plan (HBP) or Lifelong Learning Plan (LLP). You will also need to specify the exact amount you wish to withdraw. This clarity is important because the documentation and processing vary significantly depending on the withdrawal type.

Gather necessary information and documents, including your RRSP account number, valid identification, and any forms required for specific programs. For an HBP withdrawal, you will need to complete Canada Revenue Agency (CRA) Form T1036, “Home Buyer’s Plan (HBP) – Request to Withdraw Funds from an RRSP.” For an LLP withdrawal, you must complete CRA Form RC96, “Lifelong Learning Plan (LLP) Request to Withdraw Funds from an RRSP.”

Once you have the required forms and information, you can initiate the request through your financial institution. Your institution will process the request, which typically takes several business days. For HBP and LLP withdrawals, the financial institution will verify your eligibility before releasing the funds.

Upon successful processing, the funds will be disbursed to you, usually via direct deposit into your bank account or by cheque. Following the withdrawal, your financial institution will issue a T4RSP slip by the end of February of the following calendar year. This slip summarizes the withdrawal amount and any tax withheld, and it must be used when preparing your annual income tax return.