Withdrawing Money from Your RRSP

You can withdraw money from your RRSP at any time.  However the amount you withdraw will be included as part of your taxable income for that year and taxed at your marginal rate.  Amounts withdrawn cannot be recontributed into your RSP.  Upon the withdrawal the Trustee who holds the account is obligated to withhold tax, similar to income tax on your pay cheque.   For RIFFs; tax is only withheld on amounts in excess of the minimum annual payment. 

The taxes withheld on withdrawals are as follows:

Withdrawal                        All provinces                     Quebec

                                                (Except Quebec)                             

$5000 or less                      10%                                        21%

$5000 to $15000                20%                                        26%

$15000 or more                 30%                                        30%

Withdrawing Money without Paying Taxes

Home Buyer’s Plan

Under the Home Buyer’s Plan you are allowed to borrow up to $25000 from your RRSP, tax free, to purchase or build a qualifying home.  This plan is restricted to first-time home buyers who have not owned a home in the year of the purchase, or the preceding four years.  After the withdrawal, the government usually gives you a two year window, after which you must start re-paying your RRSP 1/15^th of the withdrawal for the next fifteen years.  So if you withdrew the full $25000, your mandatory repayment/contribution for that year would be $1666 ($25000 /15=$1666) If you are unable to make this repayment in a given year; the government will simply add the amount to your taxable income and you will have to pay tax on the $1666 for that year.

Lifelong Learning Plan

The Lifelong Learning Plan allows you to borrow up to $10,000 per year, tax free, from your RRSP to a maximum of $20,000 to help finance a full-time training or education program.  The student can be you or your spouse/common law partner and must be enrolled as a full-time student in a qualifying educational program.  Similar to the Home Buyers Plan, amounts withdrawn must be repaid to your RRSP within a 10 year period to avoid penalty.

Tax Deferral for Transfers and Rollovers

Taxes may be deferred for transfers and rollovers in the following situations:

·         Lump-sum distributions of shares from a Deferred Pension Plan

·         Retiring allowances; $2000 per year of service prior to 1996 plus $1500 per year of service prior to 1989 in which there was no vesting of employer contributions or an RPP or DPSP

·         Between spousal RRSPs due to legal separation or divorce

·         Lump-sum distributions from a US IRA, or a lump-sum payment from foreign pension plan if the payments are subject to tax in Canada and are not treaty protected

·         In the event of death, at which the taxpayer’s estate is taxed on the entire amount of the RRSP or RRIF, unless;

-          The funds are transferred to the surviving spouse’s RRSP or RRIF

-          The surviving spouse uses the funds to acquire an annuity

-          There is no spouse, in which case the funds can be transferred to a child or grandchild under the age of 18 and taxed in their hands or used to buy a term annuity

Obviously withdrawing money from your RRSP should be your last resort when needing some extra cash.  A withdrawal affects your long term retirement goals; forcing you to work longer, invest more or take on additional risk in your portfolio to make up the difference.

Make sure you understand all of the consequences when withdrawing funds from your RRSP; before you sign the order.  If you are unsure on how a withdrawal will affect you, please give me a call so we can discuss your options.

Have a great day,

Tracey

Source: Dynamic Funds