RRSPs: Taking Money Out

Life is not long, and too much of it must not pass in idle deliberation how it shall be spent.

~ Samuel Johnson

Our series on RRSP Basics continues today with some information on how and when to take money out of your RRSP.

Withdrawing Money Before You Retire

The idea behind RRSPs is that you won’t be taking any money out until you retire. But as we all know, life happens. Here’s how it works if you encounter an emergency where you absolutely need to take some of your money out:

  • Any money you take out of your RRSP will be added to your income at your marginal tax rate in the year you withdraw it.
  • Your withdrawal will be subject to a withholding tax which will be deducted by your financial institution. The withholding rates for Canadian residents are as follows:
    • 10% (5% in Quebec) on amounts up to $5000
    • 20% (10% in Quebec) on amounts above $5000 up to $15000
    • 30% (15% in Quebec) on amounts above $15000

*Note that you will eventually still be responsible for paying tax on your withdrawal at your marginal rate, whether that is higher or lower than the amount of withholding tax you are charged.

  • If you withdraw money from a spousal RRSP, it will be taxed in the hands of the contributor if he/she made contributions to any spousal RRSP in the year of withdrawal or either of the 2 previous years. Otherwise, the withdrawal will be taxed in the hands of the annuitant (the receiving spouse). The money can generally only be withdrawn by the annuitant.
  • When you withdraw money from an RRSP, you do not get that contribution room back again.

Withdrawing Money in Retirement

  • You can continue to contribute to an RRSP up until December 31st of the year in which you turn 71.
  • You can continue to contribute to a spousal RRSP for your spouse or common law partner until December 31st of the year in which he/she turns 71.

Once you reach the magic age of 71, you have several RRSP options:

  • Withdraw the money from the RRSP: This money would be subject to withholding tax and taxed at your marginal tax rate in the year of withdrawal as outlined above.
  • Transfer the money to a Registered Retirement Income Fund (RRIF): If you choose this option, there is no tax on the money you transfer, but you will pay taxes on any money you withdraw or receive from the RRIF.
  • Use the RRSP money to purchase an annuity for life: Life annuities pay you a prescribed amount each year until you die.
  • Use the RRSP money to purchase an annuity spread over a certain number of years: Term annuities pay you a prescribed amount each year for a certain period of time.

RRIFs

Starting the year after you set up a RRIF, you receive a minimum amount each year using a formula based on your age and the value of your RRIF. Of course the whole aim of retirement planning is to run out of life before you run out of money. In many ways, this requires that we are able to predict the future. None of us knows the number of days in our lives. We just need to plan based on what we know now and do our best to hedge against all possibilities. There is no way to get it exactly right unless you are clairvoyant.

Have you done the math yet to figure out what your retirement income might look like?

Written by Kim Petch

9 Responses to RRSPs: Taking Money Out

  1. I had the privilege of talking with somebody who was semi-retired in her 60s a few days ago. She said that the hardest part about retiring was actually SPENDING the money that you’ve spent a lifetime saving, and getting used to the fact that your account balance will typically DECREASE every year. Apparently (and understandably) it’s very unnerving to see the numbers get smaller and smaller, after 40+ years of watching them get larger and larger each year.

    Certainly it makes sense to aim to run out of life before running out of money, but I’m sure many retirees have the opposite problem – becoming comfortable with actually spending the money put into the nestegg.

    • That’s a great point George. Just the thought of my accounts decreasing makes me nervous, even though I am decades from retirement. I would be interested to hear more from retired folks on what it’s really like and how well their planning has worked out for them. The fact that your friend has not fully retired speaks volumes. It must be really difficult to let go of that income stream for good. Thanks very much for sharing your thoughts!

  2. Hi BJ,
    I am impressed with your blog and what you are doing given that you are not formally educated or trained in personal finance. As a highly accredited and experienced financial planner I want your readers to understand that withdrawing money from an RRSP prior to age 72 is not necessarily a bad thing. Also to reply to George’s comment – seeing the account go down can be stressful but by preparing a proper financial plan and working with an independent unbiased Certified Financial Planner to guide you through the retirement years can substantially reduce (likely never eliminate)those anxieties.
    We routinely encourage clients to start taking money out of their RRSP’s early in an effort to reduce and control their tax liability throughout their lives, rather than leave it all in the RRSP only to have a large amount be taxed at the highest rate (46.5%) upon death.
    We too have met many people who have a hard time shifting from saving to spending and as a result their quality of life suffers. We routinely encourage our clients (after we have done a proper plan) to spend more money and live and enjoy their life. For many this takes a few years to get comfortable with doing but inevitably they really appreciate and enjoy their new lifestyle.
    I will tell the story of my own godmother to illustrate my point. My godparents were married for 39 years and worked most of their lives saving their money and preparing for at least 20 good years of retirement. In their second year of retirement at the age of 60 my godmother was diagnosed with cancer and eight months later at the age of 61 she passed away.
    This is why I encourage everyone to prepare a proper financial plan and determine how they can go out and live the life and dreams they always wanted.

    There is also a very good calculator at http://www.tridelta.ca/retirement_100.php that will help you estimate whether or not you will out live your money and what the value of your estate and lifetime tax liability will be. You can watch a video of me on BNN discussing these issues at http://www.tridelta.ca/news_007.php .
    I have also just started blogging and am still constructing my website but you can check it out at http://www.frankwiginton.ca .

    • Thanks very much Frank. I think the information you provided is valuable for our readers. It’s always great to hear from the pros! :)

  3. i’ve been looking into more seriously contributing into my RRSP and I have to admit am kind of turned off..

    Am in my early 20s and when I look at the benefits and my timeline I think i’d be WAY better off saving for retirement in a TFSA over an RRSP

    in a TFSA
    -i can take money out whenever and not taxed
    -capital gain in US and Canadain stocks not taxed
    -I hear US dividends are taxed though?
    -invest in all the same things as a RRSP

    after reading some of the comments am under the impression
    in an RRSP
    -If you were to withdraw money out before retirement everything (even your already taxed contribution) if fully taxed as regular income?
    -sounds like RRSP are still taxed even in retirement?

    Am self employed so i don’t see any company benefits and i’ve maxed out my contribution limit on my TFSA and was thing of money some of my gain in the TFSA into an RRSP but starting to rethink this

    Am I missing something about RRSP because i don’t see any benefits for someone in my situation

    • One thing to note is that your RRSP contributions are not taxed until you take the money out. That allows you to defer paying tax on that income until you take the money out, which will hopefully be after you retire and are in a lower tax bracket. In the meantime, your investments will grow tax free, and you may just get a tax refund for the year in which you made the RRSP contribution.

      If you continue to be self-employed for your entire career, putting at least some money into an RRSP might not be a bad idea, since you won’t be collecting any pension money (aside from CPP). This is especially useful in years where your income puts you in a high tax bracket.

      I tend to favour the TFSA over the RRSP for younger and lower income Canadians, but if you’ve already maxed that out, why not put a little tax-deferred money away for retirement, pay down debt, or save for a house?

  4. Today, many people in their 50’s are taking out their rrsp’s because they are unable to seek employment. Since your EI has run out and you are not able to callect welfare if you have savings in rrsp – We must do what needs to be done – food, clothing, rent are all necessities of life that needs attending to. I shall never save for rrsp I shall find another solution as to how I am going to save my money in the future. Let’s live but One Day At A Time.

  5. If I withdraw $5000 from my RRSP and then get the 10% withholding tax, Can I withdraw $5000 the next day and still get the 10% withholding tax? Is it possible to do this?

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