When and How Can I Withdraw From My RRSP?

A Registered Retirement Savings Plan (RRSP) is a tax-advantaged savings vehicle designed to help individuals accumulate funds for retirement. Contributions made to an RRSP are tax-deductible, reducing taxable income in the year they are made. Any investment income earned within the plan grows on a tax-deferred basis, meaning taxes are not paid until the funds are withdrawn. This structure allows savings to compound more effectively over time.

Regular Withdrawals Before Maturity

Funds held within an RRSP can be withdrawn at any time, even before the plan reaches maturity. However, such withdrawals are fully taxable as income in the year they are received. The financial institution administering the RRSP will withhold a portion of the withdrawal for tax purposes at the time of the transaction.

The amount withdrawn permanently reduces the value of the RRSP. Unlike contributions, regular withdrawals do not create new contribution room and cannot be re-contributed unless new contribution room becomes available in a subsequent year. This means accessing funds early can diminish the long-term growth potential of the retirement savings.

To initiate a regular withdrawal, an individual contacts their financial institution. They specify the desired withdrawal amount and complete required forms.

Special Purpose Withdrawals

Specific government programs allow for tax-free withdrawals from an RRSP under certain conditions, provided the withdrawn amounts are repaid. The Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP) are two such initiatives.

The Home Buyers’ Plan permits eligible individuals to withdraw up to $60,000 from their RRSPs to purchase or build a qualifying home. To qualify, one must be a first-time home buyer, have a written agreement to buy or build a home, and intend to occupy it as a principal residence within one year. The withdrawn funds must be repaid to the RRSP over a maximum period of 15 years, starting in the second year after the withdrawal.

Similarly, the Lifelong Learning Plan allows withdrawals to finance full-time education or training for the individual or their spouse. An individual can withdraw up to $10,000 per calendar year, with a lifetime maximum of $20,000. The student must be enrolled in a qualifying educational program at a designated institution, lasting at least three months and requiring 10 hours or more of work per week. Repayment of LLP withdrawals must occur over a 10-year period, with the first repayment due by the fifth year following the initial withdrawal.

For both the HBP and LLP, individuals must obtain specific government forms. These forms require detailed information about the purpose of the withdrawal and the individual’s eligibility.

The next step involves submitting these documents to the financial institution holding the RRSP. The institution will then process the request. Individuals can expect processing times to vary.

RRSP Maturity Options

An RRSP must reach maturity by the end of the year the account holder turns 71. At this point, the funds within the plan must be converted into an income stream or fully withdrawn. There are three primary options available to manage the accumulated savings.

One common option is to convert the RRSP into a Registered Retirement Income Fund (RRIF). A RRIF provides a flexible income stream, with minimum annual withdrawal amounts determined by age. The investments continue to grow on a tax-deferred basis within the RRIF, but all withdrawals are fully taxable as income.

Another choice is to purchase an annuity with the RRSP funds. An annuity provides a guaranteed income for a specified period or for life, offering predictability in retirement planning. While the initial purchase of the annuity from the RRSP is not subject to withholding tax, the ongoing annuity payments received are fully taxable as income.

The third option is to withdraw the entire RRSP as a lump sum. This action results in the entire amount being immediately taxable as income in the year of withdrawal. This approach can lead to a significant tax burden, as the full sum is added to the individual’s income for the year.

To implement one of these maturity options, the account holder must contact their financial institution. This involves completing conversion forms for a RRIF or requesting quotes for an annuity. For RRIFs, individuals will also need to establish their preferred withdrawal schedule, ensuring minimum annual requirements are met.

Withdrawals in Special Circumstances

Certain life events can necessitate withdrawals from an RRSP outside of regular or planned retirement income. These special circumstances have specific tax implications and procedural requirements.

When an RRSP annuitant becomes a non-resident, there are tax implications for their RRSP. Future withdrawals may be subject to a non-resident withholding tax, at a rate of 25%, regardless of the withdrawal amount. It is necessary to inform both the financial institution and the tax authority of the change in residency status to ensure proper tax treatment.

Upon the death of the RRSP annuitant, the handling of the plan depends on whether a beneficiary was named. If a spouse or common-law partner is designated as the sole beneficiary, the RRSP can be transferred to their registered plan without immediate tax consequences for the deceased’s estate. If another beneficiary is named, or if the estate is the beneficiary, the fair market value of the RRSP is included as income on the deceased’s final tax return.

The procedural steps for these special circumstances involve notifying the financial institution of the event. For non-residency, proof of new residency may be required. In the case of death, documentation must be provided to the institution. The financial institution will then process the release or transfer of funds according to the applicable rules and beneficiary designations.

Understanding Withholding Tax and Tax Reporting

Withholding tax is an amount deducted directly by the financial institution from a taxable RRSP withdrawal before the funds are disbursed to the individual. This deduction serves as an upfront payment towards the individual’s annual income tax liability. For residents, withholding tax rates are 10% on amounts up to $5,000, 20% on amounts between $5,000 and $15,000, and 30% on amounts exceeding $15,000.

After a taxable RRSP withdrawal, the individual will receive a T4RSP, Statement of RRSP Income, tax slip. This slip details the gross amount of the withdrawal and the amount of income tax that was withheld. The T4RSP is an important document for accurately reporting RRSP income when filing an annual income tax return.

When filing their annual income tax return, individuals must report the full amount of the RRSP withdrawal as income. The withholding tax already paid, as indicated on the T4RSP slip, is credited against their total tax owing for the year. It is important to recognize that the withholding tax is not necessarily the final tax owed. Depending on their overall income and tax bracket, an individual may owe additional tax or be eligible for a refund.