Withdrawals from an RRSP
Even though our RRSP contributions are intended to help support our retirement, there may be times when we feel it necessary to make withdrawals prior to our retirement. Whether we withdraw money to help see us through a short-term financial hardship, or help finance the purchase of a home or our return to school, withdrawing from your RRSP can provide a financial solution.
While withdrawing funds from an Individual or a Spousal RRSP prior to the plan’s maturity is permitted under the Canada Revenue Agency’s (CRA) guidelines, there are number of general rules that govern such withdrawals, rules regarding withdrawals after or before your RRSP reaches its maturity date.
In the straightforward case where an RRSP reaches its maturity date on December 31st in the year that the plan’s annuitant turns 71 years of age, the annuitant must select from one of the following three basic maturity options:
- Withdraw the entire RRSP plan; include the funds in the annuitant’s income tax return, and pay the resulting income tax
- Convert the RRSP into a Registered Retirement Income Fund (RRIF)
- Purchase an Annuity with the RRSP Funds
However, in the case of simple withdrawals from an RRSP prior to its maturity where we simply want to withdraw money from our RRSP to help us through a short-term cash crunch, the financial institution that administers your RRSP is required by the CRA to withhold a portion of the withdrawn amount. In other words, you will pay a penalty (or tax). This withholding tax is then forwarded to the CRA and it is applied as an income tax credit on your income tax return in the year of the withdrawal.
There are circumstances, however, where there is not a penalty involved if you decide to withdraw money early from your RRSP. For example,if you want to purchase a home but do not quite have enough for your down payment, then withdrawing from your RRSP under the Home Buyers’ Plan (HBP) lets you come up with a down payment without paying a penalty. Or perhaps you would like to change careers and go back to school. Again in this instance you can withdraw funds early from your RRSP under the Life Long Learning Plan (LLP) in order to re-invest in your education without paying a penalty. With both these plans, the financial institution does not deduct any withholding tax because withdrawals under these plans are actually a loan to the plan’s annuitant that must be repaid. (For more detailed information regarding either of these plans with regard to withdrawing from your RRSP, see the sections Home Buyers’ Plan (HBP) FAQ and Life Long Learning Plan (LLP) FAQ.)