Think Twice: The Consequences of Early RRSP Withdrawals
Erica Stephenson - Aug 15, 2019
What happens when you withdraw from your RRSP and are there any other options you should consider?
Before you look to your retirement savings as a source of cash, it is important to consider the consequences of early Registered Retirement Savings Plan (RRSP) withdrawals.
First, the contribution room represented by the withdrawn amount will be lost forever. Many investors forget the impact of time on the value of an investment. As an example, if you make a withdrawal of $20,000, 20 years before retirement, you will forego over $53,000 in retirement savings, assuming a 5 percent return annually. This is a significant amount that would have been tax-sheltered over time.
Second, the withdrawn amounts are considered income for the year and must be reported for tax purposes. When funds are withdrawn, the financial institution will also withhold tax, depending upon the place of residence and amount withdrawn (note that the tax withheld may not fully account for tax owed on withdrawn amounts each year, so further payments may be required).
Residents of Canada are subject to the following withholding rates:
10 percent on amounts up to $5,000;*
20 percent on amounts over $5,000 up to and including $15,000;^ and
30 percent on amounts over $15,000.'
There are two ways to avoid these consequences: early withdrawal of RRSP amounts for i) the Home Buyers’ Plan (HBP); and/or ii) the Lifelong Learning Plan (LLP). Various conditions must be met in order to participate in either of these programs.
Under the HBP, individuals may borrow up to $35,000 from their RRSP in one lump sum or via a series of withdrawals throughout the year to buy or build a first-time house. The entire amount must be repaid within 15 years, starting in the second year after the withdrawal, generally at a rate of 1/15th per year. If an individual fails to make the minimum annual payment, that amount must be claimed as income on the tax return of that year.
Under the LLP, individuals may borrow up to $20,000 from their RRSP to pay for full-time training or education at a qualifying institution for an individual or an individual's spouse. A maximum of $10,000 may be withdrawn from the RRSP per calendar year (to a maximum cumulative withdrawal of $20,000) and the total amount withdrawn must be repaid over 10 years, generally at a rate of 1/10th per year, with the timing of the repayment period based on the length of enrollment of the student.
We can show you alternatives if you are considering making and RRSP withdrawal. Please contact us.
* 21 percent in Quebec
^ 26 percent in Quebec
' 31 percent in Quebec