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RRSP Withdrawal Rules

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What happens when you make an early RRSP withdrawal

Withdrawing money from an RRSP before you reach the age of 71 is possible, but you’ll have to pay tax unless you’re using the funds for the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP).

Once you withdraw money from your RRSP, it’s generally counted as income and you lose the contribution room forever. For this reason, it’s not usually recommended that an individual takes money out of their RRSP if they can avoid it. Indeed, withdrawing large sums can meaningfully impact your ability to save for retirement in a tax-friendly manner.

RRSPs withdrawals count as income

When you take money out of your own RRSP, you have to pay tax on the amount withdrawn (unless the funds are for the HBP or LLP; see below). When you make an early withdrawal, your financial institution will hold back a portion of the tax and pay the federal government on your behalf:

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In Quebec, an additional 16% provincial tax will be withheld. And in all provinces and territories, you’ll also need to report the withdrawal as income so you may need to pay additional taxes on top of the withholding tax.

What are the exceptions?

The government does allow two specific situations where Canadians can withdraw money from their RRSPs and not be subject to tax on the amount taken out. First, you and your spouse/partner may withdraw up to $60,000 each tax-free under what’s called the Home Buyer’s Plan. The HBP is designed to allow individuals to make a down payment on their first home. Essentially, people taking advantage of this plan “borrow” money from their RRSPs to make the down payment. They then have 15 years to repay the borrowed amount back into the RRSP, with the first payment due five years after the withdrawal.

In order to qualify for the HBP, you must be a first-time home buyer. To qualify as a first-time home buyer, you must not have lived in a home that you or your spouse owned in the previous four years. Or you must have a written agreement to buy or build your first home.

The second situation where you can withdraw money tax-free from an RRSP is to help pay for education costs allowed under the Lifelong Learning Plan. This applies if you or your spouse/partner (but not your children) are going back to school to pay for full-time training or education. The exception to the full-time requirement is if either you or your spouse has a disability, in which case part-time is acceptable.

You may withdraw $10,000 per year tax-free from their RRSPs under the LLP for a total lifetime amount of $20,000. Withdrawals can happen over a maximum of four years. At least 10% of the amount borrowed from the RRSP must be repaid every year. Therefore, you have 10 years to repay the entire amount that was withdrawn.

What happens if you never withdraw from your RRSP?

If you never make a withdrawal from your RRSP, the money will remain tax sheltered until you reach the age of 71. In the calendar year you turn that age, you must do one of the following:

  • Convert the RRSP into a registered retirement income fund (RRIF)
  • Purchase an annuity
  • Withdraw all your money from your RRSP

On the one hand, the government does make it favourable, from a tax perspective, to borrow money from your RRSP to fund either a down payment on a home or post-secondary education/re-training. That said, if you can keep all the money in your RRSP and don’t make a withdrawal, it’ll mean your investments can continue to grow, which should lead to a bigger nest egg at retirement.

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