This guide talks specifically about the RRSP Withholding Tax that you need to pay, when you withdraw funds from your Registered Retirement Savings Plan (RRSP), before your retirement.

RRSP Withholding Tax

Generally, when you withdraw funds from your Registered Retirement Savings Plan (RRSP) before retirement, the financial institution (RRSP plan provider) charges a withholding tax on the money that you withdraw.

At the time of writing this guide, if you are a resident of Canada then the withholding tax is

If you are in Quebec

If you are a non-resident of Canada, you will pay a 25% withholding tax rate, regardless of the size of the withdrawal.

Best way to withdraw money from RRSP without any taxes

RRSP is a retirement plan. Withdrawal of money before retirement age (71 years at the time of publication) when the RRSP matures will incur taxes.

However, life is full of surprises. There may be a year when you require funds, and withdrawing from your RRSP is your only viable option. The best times for RRSP withdrawals (in terms of incurring the least taxes) are those in which you earn little to no income.

However, there are a few exceptions when the withdrawal from an RRSP will not incur any taxes. These are:

• Home Buyer’s Plan (HBP)
• Lifelong Learning Plan (LLP)

Home Buyer’s Plan (HBP)

Applicable to first-time homebuyers. It’s important to note that, according to the CRA’s definition, even if you’ve previously owned a house, you can still qualify as a first-time homebuyer. From the CRA’s perspective, you qualify as a first-time homebuyer if neither you, your spouse, nor your common-law partner has occupied or lived in a house owned by either of you in the last four years.

This plan allows you to withdraw up to $35,000 from your RRSP without incurring any withholding taxes from your RRSP provider. You have the option to withdraw a single lump sum or several smaller amounts, but the total must not exceed $35,000 to avoid taxes.

However, there is a condition that you must repay the borrowed amount. You must repay the borrowed amount within 15 years, starting from the year following the year in which you borrowed.

Based on the amount borrowed, the CRA will send you annual notices specifying both the total amount and the minimum payment required for that particular year. If you’re unable to pay the required amount in any given year, the minimum amount will be added to your taxable income for that year. Please consult your financial advisor for more and specific information.

Lifelong Learning Plan (LLP)

This program is designed for students.

It allows students to withdraw up to $10,000 (ten thousand) annually to support their studies yourself, their spouse, or a common-law partner. 

The maximum total withdrawal is $20,000, up until January of the fourth calendar year from your first LLP withdrawal.

Repayment of the total borrowed amount must be completed within 10 years. 

The CRA will send you annual notices detailing the total borrowed amount, the remaining balance for repayment, and the amount due for the current year.

As long as you repay the borrowed amount within 10 years, you will not be subject to any taxes.

RRSP Withholding Tax Refund

If you make an RRSP withdrawal during a year when your annual income happens to be very low, you could receive up to the full amount of withholding tax back in the form of an income tax refund.

Conclusion

In conclusion, it’s crucial to recognize that RRSPs are specifically designed for long-term retirement savings. Using these funds for short-term goals is not advisable, as there are more suitable options like TFSA or FHSA, as well as other investments. 

Early RRSP withdrawals come with their own set of financial implications, including withholding taxes and potential shifts into higher tax brackets (as the withdrawn amount is added to your taxable income for the year). 

Moreover, it disrupts the powerful compounding effect that the money withdrawn would have otherwise enjoyed within the RRSP. 

There are exceptions, such as the Home Buyer’s Plan and Lifelong Learner Plan, that allow for withdrawals without withholding taxes. Generally its wise to choose years with lower income for RRSP withdrawals. In such cases, you might work with your local tax office to potentially reduce withholding taxes and even secure a full refund at the time of tax return filing. 

This strategic approach ensures that your financial decisions align with your long-term goals and maximize the benefits of your RRSP.