How To Withdraw RRSP Without Paying Tax

Learn how to withdraw RRSP's without paying taxes.
How to withdraw RRSP without paying tax
Article Overview

Did you know you can withdraw money from your Registered Retirement Savings Account tax free? If you are someone who likes to save taxes and would like to learn how to utilize these withdrawal methods, this article have some great tips.

To help all your tax needs, here are a few of our top articles for you.

How to Withdraw RRSP Without Paying Tax

1. Home Buyers Plan

To help people get into homes they want to buy, the government has created the Home Buyers Plan (HBP), which allows people to “borrow” money against their retirement savings account (RRSP) without paying taxes or interest. You can withdraw up to $35,000 in down payment for first-time homebuyers. To submit an application, you must be a Canadian citizen or permanent resident.

If you are married, you and your spouse may each take out $35,000, for a total of $70,000, to put toward the down payment on a property, as long as both of you are qualified as first-time homebuyers.

To qualify as a first-time homebuyer for HBP, you or your spouse/common-law partner cannot own a property in the last 5 years. For example, you can’t utilize the HBP until 2018 if you own a home previously and sold it in 2013.

Before you may withdraw money from your RRSP, you must provide written proof that you will be using the funds to purchase or construct a house. The residence must be you or a family member who is disabled’s principle residence.

You’ll need to pay back the loan in full before you can apply for a new HBP. Before any RRSP withdrawals are made for the HBP, the fund need to be in your account for at least 90 days.

The HBP loan has a 15-year repayment schedule, beginning in 2 years after the withdrawal. For example, if you took out $35,000 and pay it back over the course of 15 years, your yearly payment will be $2,333.33. If you didn’t pay back the amount or your paid less than the required amount, the CRA will consider the difference to be part of your taxable income for that year.

2. Lifelong Learning Plan

You can also withdraw from RRSP funds tax-free under the Lifelong Learning Plan (LLP). This plan is designed for you to withdraw tax free from your RRSP if you decide to go back to school. You or your spouse/common-law partner must utilize the money for educational purposes. Withdrawals are capped to $20,000 over the course of two years, or $10,000 each year. An LLP may be used by you and your spouse or common-law partner simultaneously without reducing either of your individual contribution limitations.

The program you enroll in must last at least three months and include at least 10 hours of weekly study (not counting homework or travel time). 

Withdrawals from an LLP must be paid back to the RRSP within ten years.

You may enjoy the benefits of the LLP numerous times, but you must pay off the outstanding LLP balance before you borrow out of your RRSP again. Once you are no longer an eligible student upon your first LLP withdrawal, repayment will begin regardless of when you took out the loan. An LLP can’t be used to pay for your or your common-law partner’s kid’s college tuition.

Withdrawing RRSP contributions for an LLP requires that they have been in the account for at least 90 days. 

3. Low Income Earning Year

Withdrawals from a registered retirement savings plan (RRSP) may be subject to a reduced tax rate or even be tax-free if your taxable income for the year is minimal or nonexistent. Unlike the tax-free withdrawal through HBP or LLP, the amount you withdrawn from RRSP will subject to withholding taxes between 10-30%. However, you may get your money back depending on the total income reported after you filed your taxes.

In 2022, the federal income tax exempt amount for an individual is $14,398. Let’s say you take $10,000 out of your RRSP in 2022 and have no other means of support. Your financial institution will withhold taxes on your behalf and send them to the Canada Revenue Agency (CRA). If your yearly income was less than $14,398 and you submit your taxes in a timely manner, you will be eligible for a tax refund.

If you earn zero income and your RRSP withdrawals are less than the provincial basic amount, your provincial tax will also be $0. For the 2022 tax year, the basic personal tax exempt amount in British Columbia is $11,302. You may expect reimbursement of the RRSP withholding tax taken from your withdrawal when you file your taxes. Besides that, you could be entitled to federal and provincial tax credits and deductions that might enhance your tax refund.

If you want to withdraw from your RRSP tax efficiently, it’s best to do so during relatively low or no-income years if you intend to minimize your taxable withdrawals.

What Early Withdrawal Means

By participating in either the LLP or HBP programs, you may use your money without paying taxes or incurring interest charges. However, using your RRSP to pay for things like tuition or a down payment might have some unintended consequences.

When you take a loan from your RRSP, the borrowed funds are removed from your investment account and reduces the compound interest and growth of that money. While you won’t have to fork up any interest when you take money out of your RRSP, you also won’t be able to earn any on it in the future.

Tax consequences may also arise if you cannot pay back the RRSP. Borrowing $15,000 from an RRSP to fund an LLP or HBP would need $1,500 per year in payments for ten years for LLP and $1,000 per year for fifteen years for HBP. If you owe $1,000 in payment but can only afford to pay $500 this year, the government will count the remaining $500 as income for the year.

To make sure you can afford the payments before taking out a loan from your RRSP, work out a budget with those payments added to make sure they fit with your cashflows.

You may use money from a savings account, such as a Tax-Free Savings Account, to make up for missed RRSP contributions if you find that you are struggling to pay back the required amount. You may access your TFSA funds whenever you choose, tax-free.

Weigh the pros and cons of enrolling in an HBP or LLP before making a commitment. It’s possible that you’ll have to recalculate your retirement benefits, which might delay your retirement date. Be sure to do the math and thoroughly understand the commitment you’re making.

How Much Tax Is There On An RRSP Withdrawal?

We all have to pay tax, it’s just the matter of whether this tax is necessary or not.

The amount of money you withdraw from your RRSP determines the percentage of tax that must be withheld.

The withholding tax is:

  • Withdrawals up to $5,000 are subject to a 10% withholding tax.
  • ‍20% on sums between $5,001 and $15,000.
  • 30% on sums above $15,000.

One tip that can help your reduce the withholding taxes is by making several withdrawals. For instance, let’s say you need $9,000 to replace the roof on your home. You may make two withdrawal requests, each for $5,000. There will be a $500 withholding tax deducted from each of the $5,000, leaving you with $9,000 to spend on the roof. Otherwise, if you withdrew $10,000 at once, $2,000 of taxes will be withheld and you will end up with only $8,000 for the same gross amount withdrawn.

The money taken out of your RRSP counts as income, so be sure to include it when you submit your taxes. The tax that is withheld from your RRSP contribution may be refundable depending on your income. But it’s also possible that your tax bill may increase depending on your marginal tax rate. In the above example, if you are in the 30% tax bracket, a 10% withholding tax on a withdrawal of $5,000 is unlikely to be sufficient to meet your tax liability.

FAQ

You can withdraw from your RRSP anytime. However, be aware of the tax consequences it may have on you for that particular year.

Yes, you may start withdrawing from your RRSP before you turn 65.

To request a withdrawal from your RRSP early, simply contact your financial advisor or the institution where your RRSP funds are held. Some RRSPs may be restricted for withdrawal if it’s locked-in.

There isn’t a financial penalty when you withdraw from RRSP other than withholding taxes upon withdrawal. You may withdraw from your RRSP without withholding taxes by utilizing the HBP and LLP if you qualify for the program.

Article Overview

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Written by:

Jim Pan, CFP, MFA-P

Jim is a dedicated, fee and advice only independent Certified Financial Planner with a focus on supporting healthcare business owners during their crucial growth phase. His expertise lies in offering comprehensive solutions to minimize taxes while embracing a holistic approach. With a career spanning back to 2010, Jim has established a strong presence in the financial industry. He proudly holds a range of designations, including Certified Financial Planner (CFP), and Master Financial Advisor - Philanthropy (MFA-P). He is currently pursuing additional designations and qualifications to better serve his clients and community. Beyond his qualifications, Jim is a member and an esteemed participant in the Million Dollar Round Table (MDRT), an exclusive global association comprising the top 1% of financial advisors. Jim's commitment extends to the community, where he spearheads numerous charitable fundraising events and plays an active role in enhancing the well-being of others. Additionally, he has contributed significantly by serving on the board of the Canadian Mental Health Association in Vancouver. Currently, he volunteers with Junior Achievement of British Columbia (JABC) to present personal finance topics to youths.

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