Whether you are nearing retirement or are just starting to make financial decisions for your future, Registered Retirement Savings Plans (RRSPs) may be a hot topic of conversation. In both circumstances, your savings grow tax-sheltered, and your contributions are tax-deductible. Where it differs — withdrawals.
When it comes to withdrawing funds from an RRSP preretirement, you will face taxes and restrictions. However, when it comes to withdrawing funds at retirement, you will be given more choices. Here is what you should know about making an RRSP withdrawal at each stage of life.
How to Convert an RRSP into Retirement Income
Canadians are only eligible to contribute to an RRSP up until the last day of December of the year they turn 71. At this point, you have three choices to convert your RRSP. You can select an RRIF account, cash withdrawal or you can purchase an annuity. It is recommended you convert your RRSP into an RRIF or annuity, but all three options have advantages.
Set up a Registered Retirement Income Fund (RRIF)
RRIFs will give you income for life, and you have the opportunity to grow that income through investments. It’s a sustainable form of income that helps you keep up with changing inflation levels.
With an RRIF account, you can make withdrawals, but you can’t make deposits into the account.
With this type of plan, you can:
- Select the amount you want to deduct monthly for your retirement income.
- Select a specific plan of investment for the account, including corporate and government bonds, treasury bills, GICs, exchange-traded funds (ETFs), mutual funds, and other similar investments you may see in an RRSP.
Take a Cash Withdrawal
If you take a full cash withdrawal after the age of 71, you will have to pay tax as if that full amount is income. Assuming your RRSP holds enough funds for many years of retirement, you could see a lot of money, hit with a high tax rate.
Some may choose this option to have full access to their money without further restrictions. However, if you choose one of the other options for converting your RRSP, you will see less money all at once, which can lead to a lower tax rate and save you more money over the long run.
Purchase Annuities
An annuity is a product contracted to a life insurance company. Once you deposit your lump sum of money (your RRSP), the insurer will invest it and pay you guaranteed income for a set duration. Depending on the annuity, this timeframe could be the rest of your life.
- Term-certain annuity: This type must cover the number of years until the annuity holder reaches the age of 90. This contract guarantees payments at regular intervals for the term.
- Life annuity: This type guarantees an income for life and the annuity holder will also receive scheduled payments.
An annuity guarantees your retirement income in regular installments, which could be monthly, quarterly, semi-annually, or annually and the money earns interest. However, once you choose how you will receive your annuity, you can’t change your mind for any reason. That also means you can’t take your money out.
In the event of your death, your dependents will continue to receive payments if you have a term-certain annuity. For life annuities, however, payments typically stop unless you have chosen otherwise.
Annuities grow in low-interest environments and are easy to maintain. On the other hand, annuities can also be expensive, and payouts can be small.
Making Early RRSP Withdrawals (Before Retirement)
If you have an emergency such as a job loss and you need cash, you can typically withdraw from your RRSP. However, any money you withdraw before the age of 71 will be taxed.
To make a withdrawal, reach out to a financial institution in the province where you set up the RRSP. The financial institution will review your request with you, and you’ll fill out paperwork for the withdrawal. Each province has specific forms to fill out.
Depending on the reason for your withdrawal, the financial institution will tell you what documentation you need to bring. They may ask for medical bills, a doctor’s note or past due notices for rent or a mortgage. There is no charge to file the request, but a bank may have a small surcharge for filing the forms and having the withdrawal authorized.
Reasons You Can Use to Withdraw from an RRSP
Financial hardship reasons can include:
- You have a low income.
- You have large disability- or medical-related bills.
- You risk eviction from a rental property or your home.
- You need the first and last month’s rent on a rental property.
- You’re over age 55 and want to unlock 50% of your RRSP one time.
- You’ve moved out of Canada and are no longer a resident.
- Your doctor states you have a short life expectancy.
- You’re age 65 or older, and the balance is small.
Tax Breakdowns for Early RRSP Withdrawals
When you make an early withdrawal from your RRSP, it’s considered income. The bank will hold back the portion that’s due to the Federal Government. This percentage is the RRSP withholding tax. However, this amount is not all that you will owe. The amount you withdraw is considered income, so if you creep into a higher tax bracket, you will also pay higher income taxes.
The Withholding Tax on RRSPs in Canada
| Withdrawal Amount | Tax Withdrawal Rate for Quebec | Tax Withdrawal Rate for the Rest of Canada |
| Up to $5,000 | 5% | 10% |
| $5,000.01 to $15,000 | 10% | 20% |
| Above $15,000 | 15% | 30% |
Exceptions include the Home Buyers Plan (HBP). Buyers can take out up to $35,000 for their first home. The other exception is the Lifelong Learning Plan, which is for spouses (not children) going back to school. You can take out $10,000 tax-free for a maximum of four years. But, 10% has to be repaid into the RRSP each year for ten years.
Cuts to Your Contribution Room
There are some further consequences of withdrawing funds early from an RRSP (apart from the exceptions mentions above). The biggest downside of prematurely withdrawing money is losing that contribution room. Unlike a tax-free savings account, if you take out the money, you will never be able to put it back in. You miss out on the amount you can save tax-free, and you lose the profits you may otherwise get from compounding.
Want to Boost Your RRSP?
Invest in your future with a registered guaranteed investment certificate (GIC). A registered GIC is held within your RRSP for a select term and can provide a secure return on your investment. Terms can range anywhere from one month to 10 years, so unless you are just days away from cutting into your retirement cake, you can select an option that suits your financial plan.
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