Withdrawing from RRSPs

Ideally, funds from RRSPs/RRIFs are meant to be withdrawn when you’re in retirement and at a much lower tax bracket than when you were when the funds were contributed into the account.  If you’re thinking about withdrawing from RRSPs, you would have three withdrawal options:

1. Regular Withdrawal
2. Home Buyers’ Plan Withdrawal
3. Lifelong Learning Plan Withdrawal

Regular Withdrawal

Withdrawals from RRSP are generally discouraged as when you withdraw, you have to pay withholding tax plus you permanently lose the contribution room that you withdrew. You cannot re-contribute the amount that was withdrawn and must earn new contribution room.

Withholding Tax on Withdrawals 

Withdrawals from Registered Retirement Savings Plan are immediately subject to withholding tax. The withholding tax rate is detailed in the table below. Please note that withholding tax rates are different in Quebec.

Example: Jamie plans to withdraw $5,000 from his RRSP. Jamie will be paying 10% withholding tax which is $500. After tax withheld, he will receive $4500, minus any applicable administration fees that his broker charges.

Note: Once withholding tax is paid, the amount of withdrawal is included in your taxable income for the year. If your marginal tax rate is higher than the withholding tax rate, you’ll end up paying additional tax.

Home Buyers’ Plan Withdrawal 

The Home Buyers’ Plan allows Canadian residents who are buying a home, building a qualifying home for themselves or a related person with disability, to withdraw from their RRSPs without tax being withheld. The program was initially introduced in 1992 and it’s a popular feature of RRSPs.  If you’re thinking about withdrawing from RRSPs regarding the Home Buyers, keep in mind the minor details below.

Amount of Withdrawal

In the 2019 budget, the withdrawal limits under the Home Buyers’ Plan went from $25,000 to $35,000 per account holder. As of date, the withdrawal limit is $35,000. Both spouses are eligible to participate, for a combined total of $70,000

Repayment of Withdrawal

Any amount withdrawn must be paid back within 15 years, starting the second calendar year following the year of withdrawal or 60 days following that year.

Keep in mind that the repayment period could be shorter than 15 years if;

• If the participant dies
• If the participant becomes a non resident
• If the participant reaches 72 years of age or older

Example: Jeff withdrew $35,000 from his RRSP. Over the next 15 years, he has to contribute a minimum of $2333.33 into his RRSP ($35,000 / 15 = $2333.33). If Jeff forgets to contribute into his RRSP for that particular year,  the $2333.33 gets added on top of his income.

Lifelong Learning Plan Withdrawal

Lifelong Learning Plan allows taxpayers to withdraw from their RRSPs for the purpose of financing full time training or education. The LLP is a different from RESPs and cannot be used to finance your children’s education.

Amount of Withdrawal

A LLP participant may be eligible in withdrawing from RRSPs up to $20,000 but this is limited to $10,000 per calendar year.

The LLP participant also has to enroll before March of the year after the LLP withdrawal. They must still be enrolled in the program in April of the year after the LLP withdrawal unless the course has been completed.

There will not be any tax withheld at the source on the amount of withdrawal. The RRSP issuer will send you a T4RSP slip showing the amount withdrawal. You would have to proceed to file a tax return even if no tax is owed.

Repayment of Withdrawals

The repayment period is 10 years or when the LLP participant leaves the educational program. The payment periods start no later than 60 days following the fifth year after the first LLP withdrawal.

The repayment period could start sooner if the LLP participant fails to qualify for a full time education for at least 3 consecutive months within 2 years of the 5 year period. Repayment will start within 60 days following the second year.

Any amount that is not repaid is added added on top of income.

Keep in mind that the repayment period could be shorter than 10 years if;

• If the participant dies
• If the participant becomes a non resident
• If the participant reaches 72 years of age or older

Non Resident’s Withdrawals

When a Canadian resident living abroad decides to withdraw from their Registered Retirement Savings Plan, the Canadian government would charge a withholding tax rate of 25%. However, this withdrawal rate could be reduced by a tax treaty that Canada may have with that particular country that the citizen is residing in. This reduction in rate is commonly 15%. It’s important to research if the country you’re residing in has a tax treaty with the Government of Canada.