Investments on an RRSP (Registered Retirement Savings Plan) can grow tax-free. RRSP is a great way to save for retirement. RRSP investments become taxable at the time of withdrawal.
RRSP withdrawals are generally taxable income. Withholding taxes are automatically deducted on RRSP withdrawals which is a down payment towards your tax bill. RRSP can be withdrawn anytime (no age restrictions) unless the RRSP is on a locked-in plan.
1. RRSP Withdrawals count as Taxable Income
RRSP withdrawals count towards taxable income, with a few exceptions. RRSP withdrawals will be taxed at your marginal tax rate.
The RRSP tax exceptions will be discussed towards the end of this article: the Lifelong Learning Plan (LLP) and Homebuyers’ Plan (HBP). However, funds withdrawn on these two exceptions need to be paid back. These exceptions are similar to borrowing from your RRSP.
RRSP withdrawals will have a higher tax rate when you have a high taxable income. Tax rates will also be lower if you have a lower income.
RRSP withdrawals are best done during retirement when you have little amounts of total income. RRSP withdrawals, while you have a $100,000 salary, will likely be taxable by more than 40%.
On other other hand, RRSP withdrawals when you have $40,000 in income or less will likely be taxed by about 20% or lower.
For a better perspective, the table below shows the federal tax rates in Canada.
Federal Tax Rates in Canada
| 2022 Federal Marginal Tax Rate | Total Taxable Income |
| 15% | First $50,197 |
| 20.5% | Portion of taxable income over 50,197 up to $100,392 |
| 26% | Portion of taxable income over $100,392 up to $155,625 |
| 29% | Portion of taxable income over 155,625 up to $221,708 |
| 33% | Over $221,708 |
In addition, provincial tax rates in Canada range from 5% to around 20%. Thus, the total combined tax rate in Canada is between 20% to 55%.
2. RRSP Withdrawals has no Age Requirement
RRSP has no withdrawal age requirement. You can withdraw anytime as long your RRSP is not on a locked-in plan.
RRSP Savings Accounts and self-directed RRSP accounts are rarely in a locked-in plan.
Can you withdraw from RRSP before 65?
You can withdraw from an RRSP anytime, even before 65 years old. However, RRSP withdrawals are taxable income. Tax rates from RRSP withdrawals may be higher while you have a full-time job. Withdrawals from RRSP are best when you have a little amount of income, so tax rates may be lower.
RRSP Withdrawal Rules at Age 71
By age 71, the RRSP has to be converted to an RRIF, annuity, or be withdrawn. You can no longer contribute to an RRSP at age 71. Also, the new RRIF account has a minimum required amount that you need to withdraw. Similar to RRSP, RRIF withdrawals are taxable income.
3. RRSP Withdrawal Withholding Tax lowers your Tax Bill
RRSP Withholding Tax is a pre-payment of taxes. In case your total tax owing is less than the tax already paid through the withholding taxes, you may get a tax refund.
Withholding taxes are essentially a pre-payment of taxes. The government may issue a tax refund if more taxes are withheld than the actual amount of taxes owed based on calculation when filing income taxes.
On the other hand, additional taxes may be needed if the withholding taxes are not enough to pay the amount of taxes.
Withholding taxes lower your tax bill since it acts similar to a down payment. For example, assume you have a total taxes from taxable income of $5,000. Assuming $2,000 is already withheld because of RRSP withdrawals, you may have to only pay the $3,000 remaining taxes payable.
RRSP Withholding Tax Rates (except Quebec)
| RRSP Withdrawal Amount | Withholding Tax Rate (Except Quebec) |
| $0 to $5,000 | 10% |
| $5,000 to $15,000 | 20% |
| More than $15,000 | 30% |
Withholding tax rates for all provinces in Canada (BC, Ontario, Alberta, etc.) except Quebec are between 10% to 30%. These withholding taxes are automatically deducted on RRSP withdrawals.
RRSP Withholding Tax Rates (Quebec)
| RRSP Withdrawal Amount | Withholding Tax Rate (Quebec) |
| $0 to $5,000 | 5% |
| $5,000 to $15,000 | 10% |
| More than $15,000 | 15% |
RRSP Withholding Tax – Example
The example below shows that 4 withdrawals are made on a calendar year (assume the province is outside Quebec). The first two withdrawals are subject to 10% withholding tax since this is the first $5,000 of withdrawals on a calendar year.
On the first withdrawal, $300 is automatically withheld and sent to the government. Of the $3,000 withdrawal, the person will receive $2,700 and be transferred to a person’s bank account.
| RRSP Withdrawal Amount | Withholding Tax | Amount Received after Withholding Taxes | |
| RRSP Withdrawal 1 | $3,000 | $300 (10%) | $2,700 |
| RRSP Withdrawal 2 | $2,000 | $200 (10%) | $1,800 |
| RRSP Withdrawal 3 | $10,000 | $2,000 (20%) | $8,000 |
| RRSP Withdrawal 4 | $2,000 | $600 (30%) | $1,400 |
| Total | $17,000 | $3,100 | $13,900 |
In this example, a total of $17,000 is withdrawn from an RRSP on a calendar year. Assume the individual has other sources of income (aside from RRSP withdrawals), which made the total taxes become $4,000.
Thus, an additional $900 needs to be paid since $3,100 is already paid through withholding taxes.
How does withholding taxes work on RRSP?
Withholding taxes are automatically deducted whenever you withdraw from an RRSP. These withholding taxes are essentially a down payment of taxes. The amount of RRSP withholding taxes may lower your total taxes owing during tax season.
4. Unlike TFSA, RRSP Withdrawals will not increase your RRSP Contribution Limit
The amount of RRSP withdrawals will not revert back to your RRSP Contribution Limit. Thus, you may not be able to contribute the withdrawals back to your RRSP.
Whether you can contribute back the RRSP withdrawals or not will depend on your remaining RRSP Contribution Limit amount.
Investments in RRSP can grow and compound tax-free. Withdrawing RRSP funds at a young age may hinder your retirement savings.
Alternative to RRSP – TFSA
RRSP may not be fully utilized when you are in a low tax bracket. After all, RRSP will be taxable eventually on withdrawal. Should you expect to make more in the future, preserving RRSP contribution limits to be used in the future instead of today is an option.
TFSA is best for medium to long-term investments while RRSP is best for retirement. Although named Tax Free Savings Account (TFSA), TFSA can hold many kinds of investments such as stocks, bonds, and ETFs.
Investments gains and dividends on a TFSA are also tax-free, even when withdrawn. TFSA offers more flexibility since withdrawals are tax-free. Also, investment gains in a TFSA are tax-free.
TFSA vs RRSP
RRSP – Best for retirement savings.
TFSA – More flexibility since withdrawals on TFSA are tax-free anytime. Best for medium to long-term investments. Investment gains on TFSA are tax-free.
| TFSA | RRSP |
| Contribution Limit of $6,000 on 2022 | Contribution Limit – 18% of your previous year’s income (up to $29,210 on 2022) |
| Investments can grow tax free | Investments can grow tax free |
| Deposits are not tax deductible | Deposits are tax deductible up to your RRSP contribution limit |
| Tax Free withdrawals | Withdrawals are taxable |
| Unused limits are added next year’s limit | Unused limits are added next year’s limit |
5. RRSP Withdrawals have no limit
Unless you are on a locked-in plan, there is no limit on how often you can withdraw in a year from an RRSP. Also, there is no limit on the amount of withdrawals.
At the same time, withdrawing too much may not be in your best interest long term. Withdrawing a large sum from an RRSP may push your total taxable income to a higher tax bracket.
RRSP withdrawals may be best to plan with a financial advisor, especially since RRSP is designed for retirement.
6. RRSP Withdrawal Tax Exemption – Lifelong Learning Plan (LLP)
RRSP withdrawals can be tax-free through the HBP and LLP. However, funds have to be paid back eventually on these two tax-free withdrawal scenarios. Essentially, you can borrow from an RRSP for these two scenarios: Lifelong Learning Plan (LLP) and Homebuyers’ Plan (HBP).
LPP allows you to withdraw from an RRSP tax-free up to $10,000 in a calendar year up to a total of $20,000 to finance full-time training or education for you or your spouse or common-law partner.
RRSP withdrawals on LLP have to be paid back within 10 years. CRA recommends repaying 1/10 of the amount every year until the LLP balance goes to zero. (Source)
For more details about LLP, here is a link to the CRA website about LLP.
7. RRSP Withdrawal Tax Exception – Homebuyers’ Plan (HBP)
HBP allows you to borrow up to $35,000 from your RRSP towards a down payment of your first home. Repayment must start the second year after you withdraw the funds and you have up to 15 years to repay the full amount. (Source)
CRA (Canada Revenue Agency) may have criteria for you to qualify for HBP. Visit the CRA page about HBP for more details.
Best way to withdraw from an RRSP
The best way to withdraw from an RRSP is to withdraw when you have little to no income, which often occurs during retirement. Thus, the total taxable income may likely be in a low tax bracket.
Although taxes cannot be avoided on RRSP withdrawals, taxes may be minimized by spreading out RRSP withdrawals over time during retirement.
Assuming RRSP withdrawals are the only source of income, up to around $10,000 of taxable income are tax-free in Canada with the Basic Personal Amount. On the other hand, withdrawals are still subject to withholding taxes. If there is zero tax owing, a tax refund may be issued after filing taxes.
RRSP Investment Options
Investment options in an RRSP include stocks, bonds, savings accounts, GICs, mutual funds, and more. There are also RRSP accounts where funds are automatically invested and managed.
A mix of investments on an RRSP is possible since you can open multiple RRSP accounts. With multiple RRSP accounts, the RRSP Contribution Limit still exists. Total deposits to RRSP accounts should be below the RRSP limit to avoid penalties.
Can I take money out of my RRSP without penalty?
You can take money out of an RRSP anytime and without penalty, even before 60 years old. RRSP withdrawals have no age restrictions. However, withdrawals from an RRSP are taxable income. Thus, withdrawals from RRSP are best when you have a low taxable income so tax rates may be lower.
How much will I be taxed if I withdraw my RRSP?
Withdrawals from an RRSP will be taxable at your marginal tax rate, which generally ranges from 20% to 55%. Thus, you may want to withdraw from an RRSP when you have a low taxable income to pay a lower tax rate. In addition, RRSP has withholding taxes that are sent to the government upon withdrawal.
RRSP withholding taxes act as a down payment of taxes and may lower your tax bill.
What happens if I withdraw from RRSP?
When you withdraw from an RRSP, the RRSP withdrawals have to be declared as income when filing your taxes. Also, RRSP withdrawals are automatically subject to withholding taxes. Furthermore, RRSP withdrawals will not be added back to your RRSP contribution limit.