You know RRSPs are meant for retirement savings.
But somewhere along the line, you start to wonder…
Especially when you see that account balance starting to climb, can I use this money for anything else?
Am I going to screw myself over if I do?
By the time you’re done reading this guide, you’ll know not only what you’re allowed to withdraw, but whether you should, or shouldn’t, make RRSP withdrawals.
Can I Withdraw Money from My RRSP Before I Turn 71?
Since the CRA designed the RRSP as a retirement savings vehicle, they encourage people to use it as one.
You can make RRSP contributions up until Dec 31 of the year you turn 71, at which point it matures, and you have to start making withdrawals.
But, technically, you can withdraw money from your RRSP whenever you want (other than locked-in scenarios).
However, only a handful of situations could be beneficial, as early RRSP withdrawals come with penalties.
What Happens if I Make an Early Withdrawal from My RRSP?
You’ll need to consider a few things if you want to make an early RRSP withdrawal. Some will hurt now, and others won’t hit you till later, but could be far, far worse.
1. You Will Pay Tax
Nobody likes paying taxes, but the CRA will always get their share.
And it’s no different with an RRSP.
The amount you’ll have to pay will depend on your marginal tax rate (i.e. what tax bracket you fall in) as RRSP withdrawals count as income.
This tax could end up being expensive, especially if you have a high salary or other large income streams.
Your bank will do you the favour of pre-paying some of your tax bill for you.
This prepayment is called withholding tax and is a percentage of your withdrawal that your bank holds back based on the amount you withdraw.
|Withdrawal||Withholding Tax Rate|
|Up to $5,000||10%|
|$5,000 up to $15,000||20%|
2. You Will Lose Contribution Room
Now, taxes are one of those facts of life you’ve likely already accepted.
But what will be harder to take, is that once you make a withdrawal from your RRSP, your hard-earned contribution room will be gone forever.
You might be familiar with how RRSPs and TFSAs build contribution room.
You might also be aware that with TFSAs, anytime you make a withdrawal, you get an equivalent amount of room back the following year.
This isn’t the case with RRSPs.
Once you’ve made your contributions to an RRSP, that’s all you get.
You can’t regain the contribution room next year if you make a withdrawal this year.
3. You Will Miss Out on Investment Growth
As if a good chunk of your retirement savings gone forever wasn’t painful enough, the effects of this lost savings can drag down your long-term return.
Consider the following example:
You worked hard and saved up $20,000 in your RRSP.
Then, for whatever reason, you felt the need to withdraw $5,000 long before you retired.
Assuming you earned a 5% return within your RRSP over 10 years, your $15,000 could have grown to about $24,400, or a gain of $9,400.
But what if your original $20,000 had the chance to grow?
Assuming the same rate of return and holding period, your investment after 10 years would be roughly $32,500, or a gain of $12,500.
That means you would have lost at least an extra $3,000 from making an early RRSP withdrawal.
How to Withdraw from your RRSP Without Paying Tax
What if there was a way to use your RRSP money without having to pay tax?
Well, there are two:
1. The RRSP Home Buyers’ Plan (HBP)
Option one is loaning yourself some of your RRSP savings and using those funds to buy a home.
The Canadian government will let you withdraw up to $35,000 from your RRSP completely tax-free, as long as you use the funds to buy a home.
You will, though, be required to pay yourself (i.e. your RRSP) back within 15 years.
And no, you don’t get to claim tax deductions on the repayments.
2. The RRSP Lifelong Learning Plan (LLP)
What if you’re not ready to buy a home? Or you’ve already got one, but want to invest more in your career through a post-graduate degree?
In any case, the Lifelong Learning Plan, similar to the Home Buyers’ Plan, lets you borrow money from your RRSP so you can attend full-time training or education.
The limits for the LLP are $10,000 a year or a total of $20,000, and you are expected to pay it all back within 10 years.
The nice thing about it is you don’t have to use the money on just tuition or books.
You can use the funds for anything you want as long as you are going to school full-time.
There are some other rules you should know, so check out Canada’s LLP page to get all the info.
What if I Need Money for an Emergency?
I’m not going to guilt you (yet) for not having an emergency fund – life isn’t easy.
If there ever comes a situation where you absolutely must use your RRSP funds, you can make a withdrawal.
But you will have to deal with the consequences mentioned earlier.
Based on your situation, you’ll have to decide whether your need for those funds outweighs the penalties listed above.
Finally, RRSP Withdrawal Certainty
Now that you know the best options for making or not making RRSP withdrawals, you can apply the examples to your situation.
Is the access to your cash worth the long-term repercussions?
Can you make use of the tax-advantaged strategies to reduce your overall tax bill?
Maybe it’s just best to keep your money in your RRSP.
Crunch the numbers to find out.
Frequently Asked Questions
- Does it ever make sense to make an early RRSP withdrawal?
Other than the HBP and LLP, specific scenarios could make sense to make an early RRSP withdrawal.
One situation could be where taking some of the tax hit now would be more beneficial than postponing it.
For example, if you are nearing retirement and have a large RRSP that will get converted to an RRIF at 71, you may want to lower your RRSP balance. This way, you could have less “income” when your RRIF starts forcing withdrawals.
This situation calls for some tax planning to see if tax savings from the lower RRIF payments outweigh the taxes owed when reducing your RRSP balance.
- Can I withdraw from my RRSP without paying tax?
On the other side of things, where you might have very little income, there is a case where you could pay no tax at all on your withdrawal.
Suppose your total income, including the money you withdraw, is less than the Basic Personal Amount for both the federal level and the province in which you reside. In that case, you’ll pay no tax on your RRSP withdrawal.
For example, let’s say you live in Alberta, and you have no income, so you decide to withdraw $10,000 from your RRSP.
For 2021, the Alberta Basic Personal Amount is $19,369, and federally the Basic Personal Amount is $13,808. Since your $10,000 income is less than both of those numbers, you’ll owe $0 in tax on that money.
The funny part is you will get a tax refund that year since your bank had to withhold some of that money when you made the withdrawal.