When can you withdraw from your RRSP?

Can you take money out of any RRSP?

Registered Retirement Savings Plans (RRSPs) aren't all the same, and some might not allow you to take money out when you want to. For example: 

• If you have a locked-in RRSP because you transferred money from a registered pension plan when you left a job. Since the money is locked in, you can’t take it out until you’re retired, except in some specific situations. You can find out from the financial institution that issued your RRSP if it’s locked in.
• If you participate in your employer’s group RRSP, check if there are plan rules about when and how you can take money out while you’re still in your job. 

But even if you own an RRSP that you can withdraw from, you must determine if it’s the right thing to do. This starts with looking at the costs involved in a withdrawal.   

How much does it cost to take money out early?

Remember that your RRSP is designed for retirement. It helps you get a break on taxes now to encourage you to save for retirement. It lets your money grow tax-free until you need it—in retirement. So, taking money out early can come at a cost—both in the short term and in the future.

Cost #1—The withholding tax

First, when you withdraw from your RRSP, your financial institution will withhold tax and send it to the government. This tax depends on how much you take out and where in Canada you live. As of publication, the withholding tax is:

• 10% (or 5% plus provincial tax in Quebec) if you take out up to and including $5,000
• 20% (or 10% plus provincial tax in Quebec) if you take out from $5,001  to $15,000, inclusive
• 30% (or 15% plus provincial tax in Quebec) if you take out over $15,000

Keep in mind you’ll need to work the withholding tax into any amount you take out. For example, if you need $5,000 and you live in Ontario, you’ll really need to take out $6,250 from your RRSP at the current 20% rate to end up with $5,000 in cash.

Cost #2—The impact on your income tax

Next, the amount you take out of your RRSP gets added to your taxable income for the year at tax time.  This means you may have to pay additional income tax on your withdrawal on top of what you’ve already paid in withholding tax.

Cost #3—Less retirement savings over time

Finally, taking money out of your RRSP now will affect your savings down the road. Those savings grow thanks to compounding interest, earning you money on money. Taking out any amount not only reduces how much you have in your plan, but also reduces the compound interest your remaining amount earns.

To get an idea of how taking money out of your RRSP can affect your savings in the long run, check out this withdrawal calculator.

You also lose the contribution room for the amount you took out. This means that even if you want to replace your withdrawal in the future, you might not have the contribution room to do so.

These are the three main costs for you to weigh against any benefit to withdrawing from your RRSP. In addition, the financial institution that issues your RRSP might charge a processing fee for withdrawals.

How can you withdraw from your RRSP without paying tax?

Your RRSP is an investment in your future, and so are home ownership and education. That’s why the Home Buyers' Plan (HBP) and Lifelong Learning Plan (LLP) let you use your RRSP to help you purchase a new home or pay for your education without initially paying a withholding tax. 

• The HBP lets you take out up to $35,000 to help you buy or build a home, and you have 15 years to pay it back.
• The LLP lets you take out up to $10,000 a year (or $20,000 total) toward full-time training or education for you, your spouse or common-law partner, and you have 10 years to pay it back.

Keep in mind that in both cases you must pay your RRSP back within those timeframes, or you’ll pay income tax on amounts as they come due. 

Can you use your RRSP before age 65?

If you’re not yet ready to retire but you need extra income, you might be thinking of using your retirement savings. At any time, you can convert your RRSP to a Registered Retirement Income Fund or use it to buy an annuity and start drawing regular minimum payments. 

In this case there won’t be a withholding tax, but the payments you’ll get will be taxable. This means if you do this while you’re still working, you must think about how this will affect your income tax. 

More importantly, you should weigh the risk of running out of money when you’ll need it most—in retirement.  

Always think of your future self

Even though your RRSP is your money, it works best when you use it for its intended purpose—your future. It’s flexible enough to help you pay for retirement, a new home, and your education. But before turning to it for short-term needs or extra cash, consider the costs and long-term implications. You may want to talk to an advisor or a tax professional to help you understand what this would mean for you, both now and in the long term.