Considering withdrawing some money from your RRSP? If so, be prepared for the government to hold back a portion of it as tax. It’s the government’s way of securing an initial tax payment each time you dip into your account. But this withholding tax isn’t necessarily all you’ll have to pay on your tax bill. The actual amount will be calculated at tax time. That said, while you could owe even more, there’s also a chance that you may even get a refund if too much was withheld.
Let’s go into more detail about the RRSP withholding tax to help you maximize savings and minimize unpleasant payment surprises.
What Is RRSP Withdrawal Withholding Tax Rate?
When you withdraw money from your RRSP, a portion of the withdrawal is withheld as tax by your financial institution. This is known as the RRSP withholding tax and serves as a prepayment of the income tax owed on that amount.
However, this isn’t the final tax amount you may owe. The exact income tax owed is calculated when you file your taxes. At that time, the actual tax you owe is calculated, including any RRSP withdrawals made during the tax year.
You may get a tax refund if the withheld tax exceeds what you actually owe. On the other hand, if the withheld tax was not high enough, you’ll owe more tax and will have to pay the difference.
Learn more: Having Trouble Figuring Out Your RRSP?
How Much Tax Can You Expect To Pay On An RRSP Withdrawal?
When you withdraw money from your RRSP, the amount you’re taxed on is based on the applicable withholding tax rate in your province and based on the withdrawal amount as follows:
| All Provinces Except Quebec | Quebec | |
| Amounts up to $5,000 | 10% | 5% |
| Amounts over $5,000 & up to $15,000 | 20% | 10% |
| Amounts over $15,000 | 30% | 15% |
In Quebec, there are additional provincial tax rates on RRSP withdrawals:
| Provincial Withholding Tax Rate | |
| Amounts up to $5,000 | 14% |
| Amounts over $5,000 & up to $15,000 | 14% |
| Amounts over $15,000 | 14% |
| Example: To give you an idea of how much you can potentially pay on an RRSP withdrawal, let’s illustrate using an example: Province: Ontario RRSP Withdrawal: $50,000 Federal Withholding Tax Rate: 30% Tax Amount Withheld: $15,000 ($50,000 x 30%) Net Withdrawal: $35,000 ($50,000 – $15,000) In this example, you would pay $15,000 in withholding tax, leaving you with a net RRSP withdrawal amount of $35,000. |
RRSP Withholding Tax Differences At RRSP Maturity
When your RRSP matures, it must be converted into one of the following options:
Convert To A Registered Retirement Income Fund (RRIF)
An RRIF is a financial product that provides retirees with a steady stream of income throughout retirement. When you transfer your RRSP funds into an RRIF, there is no withholding tax on the transfer. However, you must withdraw a minimum amount every year, which is subject to taxation.
Any withdrawals over the minimum are subject to RRSP withholding tax rates.
Purchase An Annuity
An annuity is a financial product that provides a steady stream of income, usually during retirement. When you buy an annuity, you make a payment to an insurance company, which then makes regular payments to you over a set term or indefinitely for the rest of your life.
If you use your RRSP withdrawal to buy an annuity, there is no upfront withholding tax. Rather, each annuity payment is added to your taxable income in the year you receive it.
Make A Lump-Sum Withdrawal At Maturity
If you withdraw from your RRSP in one lump sum at maturity, the amount will be immediately taxed at the respective withholding tax rate. Since the withdrawal is considered taxable income, you may also owe more taxes when you file your income taxes.
Who Pays Tax On Spousal RRSP Withdrawals?
A spousal RRSP works similarly to any other RRSP. The key difference is that you may contribute to a spousal RRSP, but it remains in your spouse’s name.
The timing of spousal RRSP contributions will determine who pays taxes on withdrawn RRSP funds:
- No Contributions Made Within 3 Years: If no contributions were made to a spousal RRSP in the withdrawal year or the previous 2 calendar years, the spouse (or planholder) will be taxed on the withdrawal.
- Contributions Made Within 3 Years: If contributions were made to a spousal RRSP in the withdrawal year or the previous 2 calendar years, the contributor will be taxed on the withdrawal.
The purpose of this rule is to provide spouses with tax advantages while preventing contributors from avoiding immediate taxation.
Can You Avoid The RRSP Withholding Tax?
There are legal ways to reduce or avoid withholding tax on RRSP withdrawals. The approach you take depends on the purpose and method of withdrawal.
Transfer Funds To An RRIF
By converting your RRSP into an RRIF before withdrawing the funds, you can avoid withholding tax if you stay at the minimum withdrawal amount. This minimum is determined on January 1 each year by a specific formula from the Income Tax Act. Only amounts in excess of the minimum withdrawal amount are subject to withholding tax.
Keep in mind, however, that withholding tax is applicable once you start withdrawing from your RRIF.
Withdraw From Your Home Buyers’ Plan (HBP)
You can withdraw up to $60,000 from your Home Buyers’ Plan to purchase or construct your first home without paying withholding tax. The caveat is that the funds must be repaid within 15 years.
Withdraw From Your Lifelong Learning Plan (LLP)
You can withdraw up to $10,000 per calendar year from your Lifelong Learning Plan to cover education costs without paying withholding tax. However, the funds withdrawn must be repaid within 10 years.
Defer Withdrawals
Rather than making an immediate, one lump-sum withdrawal, you can defer or spread out your withdrawals over time to minimize the amount of withholding tax you have to pay each year.
RRSP Withdrawal Tax – If Drawn Early
If you withdraw from your RRSP early, you’ll face immediate tax consequences. The idea behind an RRSP is to save for retirement and allow investments in the account to grow tax-free. But you must wait until the appropriate time to withdraw, otherwise you’ll minimize your tax advantage.
Consequences of withdrawing from your RRSP early include the following:
- Immediate Withholding Tax: Your financial institution will automatically and immediately deduct withholding tax based on how much you withdraw, as noted on the earlier chart.
- Potentially Higher Income Tax: The amount you withdraw is added to your taxable income for the year. You may owe additional tax on top of what was withheld, depending on your total income.
Other Pensions And Benefits That Can Affect Your Taxes
It’s important to understand how other pensions and benefits affect your overall tax situation before you consider withdrawing from your RRSP.
Canada Pension Plan (CPP): CPP payments are not taed automatically. However, they become part of your income and will, therefore, increase your taxable income when you file your taxes.
Old Age Security (OAS): If your income is over a specific threshold, your OAS payments can be reduced. Withdrawing a large sum from your RRSP can trigger an OAS clawback, in which a portion of your OAS benefits is reduced.
Employer Pensions: If your employer offers a pension plan, large RRSP withdrawals can place you in a higher income tax bracket, which will impact the overall amount of taxes you owe on your pension income.
| Example: Assuming the following, how much will you pay in taxes? – Province: You live in Ontario – OAS Payments: You receive the maximum monthly payment for seniors between 65 and 74 years of age: $727.67. This comes to $8,732.04 per year. – CPP Payments: You receive the average monthly CPP payment for new beneficiaries starting at age 65: $808.14. This comes to $9,697.68 per year. – RRSP Withdrawals: You withdraw $30,000 each year ($2,500 per month) – Total Income: $48,429.72 Total Taxes Owed: $7,988 Total Taxes Paid (RRSP Withholding Tax) Since your yearly $30,000 RRSP withdrawal exceeds $15,000, the withholding tax rate would be 30%. This works out to $9,000 ($30,000 × 30%). Since $9,000 was withheld as a result of your RRSP withdrawals, you would receive a tax refund, as the amount exceeds the total income tax that you actually owe. |
Final Thoughts
Understanding the RRSP withholding tax is an important concept to understand before you make any withdrawals from your account. In particular, the RRSP withholding tax can have a significant and immediate effect on your income tax bill. Be sure to consult with an experienced tax professional to help you understand how your RRSP withdrawals could impact your tax situation.
