Your guide to RRSP withdrawals: Understanding withholding tax rates, withdrawal timing and contribution room impact. (2024)

After years of hard work, your retirement will be well-deserved — and in Canada, saving through a Registered Retirement Savings Plan (RRSP) helps you build a bridge to your retirement dreams. Not only does an RRSP reduce your current tax burden, but it also helps ensure your retirement years are financially secure and fulfilling.

But how do these benefits play out when you want to withdraw from your RRSP? Understanding when and how to make a withdrawal can be crucial for preserving the benefits of saving for retirement through an RRSP.

Thinking about withdrawing from your RRSP? You can, potentially, make an RRSP withdrawal at any time — but you may face certain tax implications.¹ Let's unpack what the RRSP redemption rules mean for you.

An RRSP is more than just a savings account: It's a smart tool for Canadians to reach their retirement goals, complete with some great tax advantages. But, as with anything tax-related, there are a few RRSP withdrawal rules you'll need to keep in mind. Here's what you need to know.

Consider this: The “when" of your RRSP withdrawal affects your withholding tax and, ultimately, how much income tax you end up paying. This means deciding when to withdraw funds from your RRSP isn't just about when you need the money. It's about making your withdrawals in a tax-smart way.

Timing is everything, and choosing the right time can influence your overall income tax situation when paying taxes for the year. Whether you're planning a regular withdrawal or eyeing an early one, it's important to seek advice from a tax specialist to fully understand the tax implications.

To illustrate, consider the tax impact of making an RRSP withdrawal in the following three different situations:

• During a career break. Suppose this year you decided to take a leave, which results in a significant reduction of your income for the year. Withdrawing from your RRSP during this period could be tax-efficient, since your income is lower so you'll likely be in a lower tax bracket — which means your RRSP withdrawal could be taxed at a lower rate.
• In a high-income year. Let's say you've received a substantial bonus at work this year and you want to use this bonus for the down payment on a weekend cottage. It's not enough on its own, though, so you're thinking about making an RRSP withdrawal to help with the down payment. In this case, it may not be a tax effective decision to take money out of your RRSP, as it adds to your already increased income for the year, and could push you into a higher tax bracket.
• Post-retirement. You've retired, and you're no longer receiving regular employment income, which possibly puts you in the lowest tax bracket you've been in for years. Strategically and gradually withdrawing from your RRSP during these retirement years can help keep your total income within the lower tax bracket threshold and maximize your after-tax income.

If you are looking to purchase your first primary home, or looking to pay the tuition for your education, there are two great ways that you can leverage RRSP to withdraw funds tax-free and repay later.

• Home Buyer's Plan (HBP). The HBP opens doors for eligible first-time homebuyers, allowing them to withdraw up to $60,000 from the RRSP tax-free and repay later.
• Lifelong Learning Plan (LLP). If education lies on your horizon, the LLP allows you to withdraw up to $10,000 tax-free from your RRSP and repay later.
• RRIF (Registered Retirement Income Fund). As retirement nears, converting your RRSP into an RRIF could be a wise decision, offering you a different approach to managing your retirement funds.

Each of these options comes with its own unique set of rules and tax implications,^{3, 4, 5} and depending on your specific circ*mstances, may be worth considering as an alternative to an RRSP withdrawal.

The bottom line? No matter what age you are, if you withdraw from your RRSP, you'll need to deal with the tax implications — which can be significant, depending on your financial circ*mstances for example your income level and your tax bracket at the time of withdrawal.

So what should you do if you're getting close to retirement (for example, you're 60 or 65) and you'd like to begin getting continuous income from your RRSP before you retire? In this scenario, a smart strategy is to convert either the full amount or a partial amount of your RRSP to an RRIF.

By converting to an RRIF, you can obtain a consistent income stream. There is no tax withheld when the minimum amount is withdrawn from the RRIF. Any withdrawals over the minimum amount would attract withholding tax similar to withdrawals from an RRSP.

The rest of your retirement funds continue to accrue benefits on a tax-deferred basis. You can even continue contributing to an RRSP, as long as you aren't 72 or older and you still have unused RRSP contribution room.

Let's look more closely at the impact of withdrawals on your RRSP contribution room. Contribution room is the maximum amount you're allowed to contribute to your RRSP for the year:⁶ Think of it as a bucket that fills up each year based on your income and unused past contribution room.

When you withdraw from your RRSP, this amount, which is also subject to withholding tax, isn't added back to your contribution room. Here's an example: Let's say your contribution room for this year is $40,000 and you withdraw $10,000 from your RRSP. Your contribution room doesn't revert to $40,000 the next year to make up for the amount you withdrew this year. Instead, it remains at $30,000, plus any new contribution room you've accrued based on that year's income.

The result? A reduced contribution room which limits your future RRSP contributions and potential tax-deferred growth. Combine this with the possibility that your RRSP withdrawal could push you into a higher tax bracket (and tax rate), and it's clear that the long-term effects of making a withdrawal should be carefully considered in your financial planning.

When you make withdrawals from your RRSP, be prepared for the withholding tax that your financial institution will apply. Here are the current withholding tax rates (Quebec residents face slightly different rates plus an additional provincial tax):⁸

• For withdrawals up to $5,000: 10% (19% in Quebec)
• For withdrawals between $5,000 up to $15,000: 20% (24% in Quebec)
• For withdrawals over $15,000: 30% (29% in Quebec)

Your RRSP deduction limit is the maximum you can claim as a deduction on your tax return for your total RRSP, PRPP (Pooled Registered Pension Plan) and SPP (Specified Pension Plan) contributions. If you contribute too much, it's called over-contribution.

Here's the deal: If your RRSP contributions exceed your limit by more than $2,000, you've over-contributed. The Canada Revenue Agency (CRA) applies a 1% monthly penalty tax on these over-contributions.

If you accidentally contribute too much, don't panic: You have options, such as withdrawing the excess contributions (keep in mind that the withdrawal might be taxable) or demonstrating that the contributions are part of a qualifying plan.⁹

Your best bet for avoiding an over-contribution penalty? Keep a close eye on your contribution limits, which you can easily find in your CRA My Account or on your latest tax assessment.¹⁰

Spousal RRSPs are RRSPs you set up for your spouse or common-law partner, and the rules for spousal RRSP withdrawals have their own unique twist, adding an interesting layer to retirement planning.

If the annuitant withdraws funds from the spousal RRSP within 3 years of a contribution, the amount will be included in the income of the contributor in the year of the withdrawal.

Form T2205 helps you sort out what amount goes on which person's tax return.¹¹ It's all about teamwork here, ensuring you both stay on top of your tax game.

Now that we've explored the complexities of RRSP withdrawal rules, let's broaden our perspective by comparing RRSPs with TFSAs (Tax-Free Savings Accounts).

RRSPs are excellent for retirement savings, deferring taxes on your funds until withdrawal, while also providing a tax deduction on your contribution. TFSAs, on the other hand, offer immediate tax-free growth plus the flexibility of withdrawing your funds tax-free. On the downside, there's no tax deduction for your TFSA contributions.

Deciding which is more beneficial depends on your individual financial goals and circ*mstances. Here's how RRSPs and TFSAs compare:

Your RRSP is much more than just a savings account: It provides you with the means to enhance your financial well-being. Being informed so you can make the best choices about your RRSP withdrawals will help ensure your retirement is as comfortable as it can be.

Find out how much you’ll need to save for your retirement with our retirement savings calculator. Plus, learn how you can conveniently and automatically build up you your savings with our Pre-Authorized Contributions tool.