RRSP withdrawals and tax consequences

Region: Ontario Answer # 270

Many people wait until they retire to withdraw money from their RRSP. This is because when you retire, your income usually decreases, so that when you add your income for the year to the amount that you withdraw from your RRSP, your total income is still low enough to keep you in a lower tax bracket.

Depending on the type of RRSP investment you purchase, you may be able to withdraw money at any time. When you withdraw money from your RRSP, it will be taxed as income, and a withholding tax will apply at the time of the withdrawal. You must include the amount you withdraw on your tax return as part of your total income for the year. This will probably increase the amount of income tax you must pay.

If you withdraw RRSP funds under the Home Buyers’ Plan (HBP – $35,000 limit), or the Lifelong Learning Plan (LLP – limit of $20,000), however, it is not considered income, and is not taxed at that time. Also, there is no withholding tax when you withdraw the RRSP funds under those plans. Further, you are able to repay the amount you withdraw back into your RRSP.

Even if you are not retired, but your income is very low, you may want to withdraw money from your RRSP to supplement your income. Depending on where you live and the amount of money you want to withdraw, this may affect the tax bracket you are in. Also, once RRSP funds are withdrawn they cannot be repaid into the RRSP at a later date (unless withdrawn under a qualified Plan, such as the HBP or the LLP). This means that future contributions can only be made if you have unused contribution room.


Tax rates

In Canada, the current withholding tax rates for withdrawing funds from an RRSP are as follows:

  • 10% on amounts up to $5,000;
  • 20% on amounts over $5,000 up to including $15,000; and
  • 30% on amounts over $15,000.

For general information, contact Canada Revenue Agency.


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