Need to withdraw from your RRSP early? How much tax will you pay? Plus, ways to avoid the RRSP withholding tax.

Thinking about early an RRSP withdrawal? Here’s why it’s important to stay invested.

If you needed a chunk of cash when you were younger, you might have smashed open your piggybank for stray coins and birthday money. You may be tempted to do the same with your Registered Retirement Savings Plan (RRSP), but think twice before you bust open the account: outside of a few exceptions, early withdrawals can trigger a hefty tax bill – and that’s by design.

When the RRSP was launched in 1957, the government wanted to make it difficult for Canadians to use the money inside it for anything other than retirement. To achieve this goal, it has imposed tax consequences for early withdrawals, with few exceptions.

But what if you need money? Ideally, you may want to consider pulling from your Tax-Free Savings Account (TFSA), a non-registered account or your savings first before turning to your RRSP. But if you’ve exhausted those options, here’s how early withdrawals work – and some ideas for other sources of funds you may want to consider before dipping into your retirement savings.

What is the RRSP withholding tax?

When you withdraw from your RRSP, there are taxes withheld and remitted to the government before it lands in your bank account. This is called the RRSP withholding tax. Because RRSP withdrawals are treated like ordinary income, the tax is meant to cover any taxes you may owe – the Canada Revenue Agency (CRA) doesn’t want you to spend that money without getting its share. If you ultimately owe less than what the CRA has withheld, you will get some of that tax money back, but you could also end up owing more tax, depending on your other income for the year.

Here are the RRSP withholding tax rates in all provinces, except Quebec:

• 10% on withdrawals below $5,000
• 20% on withdrawals between $5,000 and $15,000
• 30% on withdrawals over $15,000

In Quebec, the withholding tax is lower, at 5%, 10% and 15%, respectively, in addition to the federal withholding tax. But before you move to La Belle Province, note that for a single withdrawal from RRSP funds held in the province of Quebec, there will be 14%  provincial income tax withheld (15% prior to 2023), in addition to the above 5%, 10% or 15% federal tax withheld. 

Income tax: Another penalty of early RRSP withdrawal

While the withholding tax might cover the income tax you owe, it also might not. For example, if you make $130,000 a year, your marginal tax rate is likely above 40% (higher than the maximum 30% withholding tax), so you’ll have to pay more tax on your RRSP withdrawal come income tax filing time.

What’s worse, taking out money from your RRSP could bump you into a higher tax bracket. For example, if RRSP income bumps your total taxable income above $107,000, your marginal federal tax rate jumps from 20.5% to 26%, on top of your provincial taxes.

How to avoid the RRSP withholding tax when you withdraw money from your retirement funds

Not every withdrawal will trigger a tax hit. Here are two exceptions.

Home Buyers’ Plan (HBP)

Through this plan, if you are a first-time homebuyer, you can effectively borrow up to $35,000 from your RRSP to buy a house without paying either withholding tax or income tax. The catch is that you have to start returning the money to your RRSP within two years, and you have to pay back the full amount within 15 years. You will have to pay tax on any money you don’t return to your account.

Lifelong Learning Plan (LLP)

If you are enrolled in college, university or another post-secondary training program, or your spouse is, you can take out up to $20,000 without paying tax on it. You can take out $10,000 per calendar year, but you have to start paying it back five years after your first withdrawal, and you have up to ten years pay the full amount back.

When can you withdraw money without triggering a withholding tax?

In the year you turn 71, you will have to convert your RRSP into a RRIF, although it can be done earlier than age 71. Once you convert your account, you’ll have to take out a minimum amount each year; this is called the RRIF minimum withdrawal. This amount varies with your age (for example, it is 4% when you’re age 65 and 4.17% when you’re 66). There is no withholding tax on the RRIF minimum withdrawal, but you will still have to pay income tax on it. So, if you’re 55 and still earning a high income, this may not be the first option to consider.

The biggest cost of early RRSP withdrawals

We’d be remiss not to mention the biggest cost of an early withdrawal from your RRSP. And in this case, it’s not the government taxing you: you will be shortchanging your future self. After all, $20,000 has the potential to grow to $48,545 in 30 years, assuming a 5% rate of return on your investments.

This chart shows you why it’s important to stay invested as long as you can (assuming a 5% annual rate of return).

*The growth values are pre-tax

Other ways to avoid or reduce RRSP withdrawal taxes

Often, after calculating the tax on your RRSP withdrawal, you’ll likely find you’re better off looking for other sources of funds, such as a home equity line of credit or refinancing a mortgage. But if you decide you need to withdraw from your RRSP early, taking out smaller amounts per calendar year will potentially help keep your tax rate low. Alternatively, withdraw a lower amount from each of your RRSP and your spouse’s RRSP, which can save you withholding and income taxes, depending on your respective income brackets.

Keep in mind, though, that you’ve been saving for your retirement for a reason – that villa in Spain, condo in Florida or golf club membership when you’re 65. If you can avoid dipping into your retirement savings now, your future self will thank you.

If you want to see how staying invested can help you stay on track with your retirement goals, check out our retirement calculator, and estimate your year-end tax balance with your total income and total deductions with our tax calculator.