Withdrawals from an RRSP are added to your taxable income for the year. Your financial institution withholds tax at source when you withdraw, and you settle the difference when you file your return, which may mean owing more if your marginal rate is higher than the withholding rate.
Withholding tax rates
| Withdrawal amount | Withholding (outside Quebec) |
|---|---|
| Up to $5,000 | 10% |
| $5,000.01 to $15,000 | 20% |
| Over $15,000 | 30% |
Quebec residents have lower federal withholding plus Quebec provincial withholding.
Withholding isn't the final tax. A $10,000 withdrawal has $2,000 withheld, but if your marginal rate is 40%, you'll owe about $2,000 more at tax time. You also permanently lose that contribution room.
Home Buyers' Plan
First-time buyers can withdraw up to $60,000 tax-free to buy or build a qualifying home, repaying it to the RRSP over 15 years. For a first home, the First Home Savings Account is usually better, and the two can be combined. See FHSA vs TFSA vs RRSP.
Lifelong Learning Plan
You can withdraw up to $10,000 a year, and $20,000 in total, to pay for full-time education for you or your spouse, repaying it over 10 years.
At 71: convert to a RRIF
By December 31 of the year you turn 71, you must convert your RRSP to a RRIF or annuity, or withdraw it as a lump sum, which would be fully taxable. RRIFs require minimum annual withdrawals that rise with age.
Frequently asked questions
How much tax do I pay on an RRSP withdrawal?
The withdrawal is taxed at your marginal rate. 10% to 30% is withheld upfront outside Quebec, and any balance is settled on your tax return.
Do I get my RRSP room back after a withdrawal?
No, except for Home Buyers' Plan and Lifelong Learning Plan withdrawals that you repay.
Can I avoid withholding by taking several small withdrawals?
It can reduce the amount withheld upfront, but not the tax you ultimately owe, which is based on your total income.
Sources
- Canada Revenue Agency, Making withdrawals