Withdrawing from your RRSP
Registered Retirement Savings Plans (RRSP) have been a great investment vehicle for anyone who wants to spend their retirement years without worrying about financial expenses. You can withdraw at any time that you want as long as you’re retired. However, if you cancel before your retirement, there might be some tax consequences. So, before you unknowingly withdraw from your RRSP account before your retirement, here’s what you need to know.
Information you should know before withdrawing from an RRSP account
- When you withdraw money from your RRSP account, you will have to declare the total amount withdrawn as income in the year you retire. This can result in a hefty tax bill.
- You should think wisely before withdrawing money from your RRSP account to cover or clear your debts. Early withdrawals would mean that you lose the power of compounding. What it means is, long-term RRSP contributions earn money on both the contribution and any (Interest) on investment earnings. Therefore, you must declare the total withdrawal amount from your RRSP account in your Income tax. While some tax is withheld at the time of the withdrawal, it might not be enough to cover the total amount of income tax that will be owing. A better option can be to withdraw from a Tax-Free Savings Account (TFSA) or consult a financial professional and re-jig your budget to pay more towards debt repayment.
- You don’t get contribution room back. The Canada Revenue Agency (CRA) only allows you count that contribution once – you can’t add back the withdrawal amount to the existing contribution room in your RRSP account.
- You may request a “gross” or “net” withdrawal. Example – A $1,500 gross retreat will deduct $1,500 from your RRSP, and the amount you receive will have taxes and administrative fees deducted. If you want to choose the “net” withdrawal, you will receive a cheque for $1,500, but the actual withdrawal amount from your account will be higher to cover the withholding tax and any administrative fees.
Remember: You will have the option to name a beneficiary on an RRSP, and you will have the freedom to change it at any time you want. However, you will not change the beneficiary without the existing beneficiaries’ confirmation if you put an irrevocable clause. If you name an irrevocable beneficiary, you will not be able to withdraw any cash unless the beneficiary provides consent. Suppose the beneficiary cannot provide support due to being young age o suffering from any cognitive or mental impairment. In that case, specific steps will have to be taken, and you will have to speak with your financial institution.