What Happens When Taking Money Out of an RRSP?

A Registered Retirement Savings Plan (RRSP) is a savings plan that allows contributions to grow with taxes deferred to provide income during retirement. While its primary function is to support you financially in your later years, the funds are accessible before then. This article explains the different ways funds can be withdrawn from an RRSP and the consequences of doing so.

Tax Implications of RRSP Withdrawals

Withdrawing funds from an RRSP before retirement has direct tax consequences, as any amount you take out is considered taxable income. For instance, if your annual income is $60,000 and you withdraw $10,000 from your RRSP, your taxable income for that year becomes $70,000. This increase could push you into a higher marginal tax bracket, meaning a larger percentage of your income will be paid in taxes.

When you make a withdrawal, your financial institution deducts a withholding tax as a prepayment of the income tax you will owe. For all provinces except Quebec, the withholding tax rates are 10% on withdrawals up to $5,000, 20% on amounts from $5,001 to $15,000, and 30% on any amount over $15,000. For residents of Quebec, the federal withholding tax is 5% on withdrawals up to $5,000, 10% on amounts from $5,001 to $15,000, and 15% on amounts over $15,000, plus a separate provincial withholding tax.

The withholding tax may not cover your entire tax obligation for the withdrawal, as the final amount is calculated when you file your annual income tax return. If the amount withheld was less than the total tax due, you will have to pay the difference. If too much was withheld, you may receive a tax refund.

Another consequence of a standard withdrawal is the permanent loss of contribution room. The contribution room you used for the original deposit is not restored after a withdrawal. This means you cannot re-contribute the amount without using new contribution space, which can affect long-term savings goals.

The Home Buyers’ Plan and Lifelong Learning Plan

Specific government programs allow for tax-free withdrawals from an RRSP if the funds are repaid within a set timeframe. The two primary programs are the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP).

The Home Buyers’ Plan helps individuals purchase or build their first home. To qualify, you must be a first-time home buyer, meaning you have not owned and occupied a home as your principal residence in the last four years. Under the HBP, you can withdraw up to $60,000 from your RRSP, but the funds must have been in the account for at least 90 days. The repayment period is 15 years, and for withdrawals made between January 1, 2022, and December 31, 2025, repayment begins in the fifth year after the first withdrawal. If you miss an annual repayment, that amount is added to your taxable income for that year.

The Lifelong Learning Plan allows you to withdraw funds from your RRSP to finance full-time training or education for yourself or your spouse. The program allows for a withdrawal of up to $10,000 per year, with a total maximum of $20,000, for a qualifying program at a designated institution. The repayment period for the LLP is 10 years, with the first repayment due no later than the fifth year after the first withdrawal. Similar to the HBP, any missed annual repayment becomes taxable income for that year.

How to Make a Withdrawal

The process for withdrawing funds from an RRSP begins by contacting the financial institution that holds your account. The specific form you need depends on the type of withdrawal you are making. For a standard taxable withdrawal, your institution provides its own form, while Form T1036 is for the Home Buyers’ Plan and Form RC96 is for the Lifelong Learning Plan.

After submitting the completed form, the institution will process your request, which often takes a few business days. For a taxable withdrawal, the amount you receive is the gross amount minus the applicable withholding tax. For withdrawals under the HBP or LLP, you will receive the full amount requested, as no tax is withheld.

Converting an RRSP to a RRIF

As you approach retirement, a common method for drawing income from your RRSP savings involves converting it into a Registered Retirement Income Fund (RRIF). This conversion is mandatory by the end of the year in which you turn 71. The investments previously held in your RRSP can be transferred directly into the RRIF.

Once the RRIF is established, you are required to withdraw a minimum amount each year, starting the calendar year after the RRIF is opened. The government sets the minimum withdrawal percentage based on your age, and this percentage increases as you get older. No withholding tax is applied to these minimum annual withdrawals, but the amount withdrawn is still fully taxable income.

You can withdraw more than the minimum required amount from your RRIF at any time. Any funds taken out above the prescribed minimum for the year are subject to withholding tax. This structure allows for continued tax-deferred growth on the funds remaining in the RRIF while providing a regular income stream.