Making RRSP withdrawals before and after you retire

Your Registered Retirement Savings PlanRegistered Retirement Savings Plan A plan that lets you save for retirement while lowering your income taxes. You choose how you want to invest your savings. You don’t pay tax on any money in your account until you take it out.+ read full definition (RRSPRRSP See Registered Retirement Savings Plan.+ read full definition) helps you save for retirement. Once you retire, you can convert it into a Registered Retirement Savings Plan (RRIFRRIF See Registered Retirement Income Fund.+ read full definition) or annuityAnnuity A contract usually sold by life insurance companies that guarantees an income to you or your beneficiary at some time in the future. An annuity is a contract with a life insurance company. When you buy an annuity, you deposit a lump sum of money, and the insurance company agrees to pay you a guaranteed…+ read full definition, to provide a regular stream of retirement income. Or you can withdraw your savings in cash. You can also withdraw money before you retire. Whenever you want to withdraw your RRSP savings, there are taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition implications to be aware of.

On this page we answer

When can you withdraw from your RRSP?

You can withdraw from most RRSPs before or after you retire. But it’s important to understand how and when you make a withdrawal impacts your taxes.

Withdrawing from your RRSP before you retire

If you withdraw from your RRSP before you convert it in retirement, this amount will be considered taxable incomeTaxable income The amount of income you have to pay tax on, after tax credits and deductions.+ read full definition. As a result, you will likely pay more in income taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition that year. You will also be charged a withholding taxWithholding tax Tax that comes off your pay or other income and goes to the government before you get any money.+ read full definition by your financial institution. For these reasons, withdrawing from your RRSP before you retire should ideally be done as a last resort.

Remember

If your RRSP is a locked-inLocked-in An account that you cannot take money out of until you retire. In most cases, you can’t get a cash payout. Your plan may make exceptions if you have a terminal illness, or a small pension benefit.+ read full definition plan, you won’t be able to withdraw from it before you retire, for any reason.

Withdrawing from your RRSP when you retire

There are two ways to convert your RRSP into income when you retire.

Convert your RRSP to a RRIF

A Registered Retirement Income FundRegistered Retirement Income Fund A plan that holds your retirement savings and provides income after you retire. It works like an RRSP in reverse because you withdraw money instead of saving. There are rules about how much you can withdraw each year.+ read full definition (RRIF) can be opened any time, but no later than the end of the year you turn 71. You open an RRIF by transferring money from your RRSP. Once the RRIF is set up, you can’t contribute any more to the plan.

Because RRIFs are tax-sheltered, like RRSPs, you can choose to hold investments in your RRIF such as GICs, mutual funds, ETFs, stocks and bonds. But you’ll have to take out a minimum amount every year.

Learn more about RRIFs.

Buy an annuity with your RRSP funds

You can use your RRSP savings to buy an annuity. An annuity is a contractContract A binding written or verbal agreement that can be enforced by law.+ read full definition with a life insurance companyInsurance company A company that sells insurance products. Some companies sell only life insurance. Some sell only property insurance. Others sell all types of insurance.+ read full definition. You deposit a lump sum of money, and they agree to pay you a guaranteed income for a set period of time, or for the rest of your life.

Annuities are purchased from a licensed insurance agentInsurance agent A person who is trained and licensed to give expert advice and sell insurance. Some get extra training so that they can also sell investments. They get paid by the companies whose products they sell.+ read full definition or brokerBroker A registered person who brings together someone who wants to buy investments with someone who wants to sell. Brokers often charge a fee or commission for buying and selling investments for you.+ read full definition, or from a financial advisor who is licensed to sell insurance. Some investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition firms may also have staff who can sell annuities.

Learn more about annuities.

You can also choose to put money in both a RRIF and an annuity. This can make sense if you want to keep some control over your investments and payment optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition, but also want the security of guaranteed income.

Your RRSP funds are likely just one part of your overall retirement picture. When it’s time to convert your RRSP into retirement income, consider speaking with a registered financial advisor.

What is the impact of dipping into your RRSP before retirement?

You can take money out of your RRSP before you retire. For example, you might tap into your RRSP to cover costs of an emergency situation. But you will pay an immediate tax on the money you take out, and possibly more at tax time. And you’ll permanently lose the contribution roomContribution room The amount you can put into a savings plan like a Registered Retirement Savings Plan (RRSP). If you do not put the full amount into the plan each year, you will have extra, unused contribution room that you can use in later years. Example: Let’s say you can contribute $12,000 to your RRSP this year,…+ read full definition you originally used to make the contributionContribution Money that you put into a savings or investment plan.+ read full definition.

Two tax consequences of withdrawing from your RRSP before retirement

1. You pay a withholding tax

Your financial institution will hold back the tax on the amount you take out and pay it directly to the government on your behalf.

The withholding tax rate is between 10% to 30% (except in Quebec), depending on how much you take out of your RRSP.

2. The amount you withdraw is taxable income

You have to report the amount you take out on your tax return as income. At that time, you may have to pay more tax on the money — on top of the withholding tax. It depends on your total income and tax situation. Learn more about the rules and consequences of taking money out of your RRSP.

ANTI-AVOIDANCE RULES

There are anti-avoidance rules to prevent people from using or receiving their RRSP funds without including these amounts in income. You’ll pay tax equal to the fair market valueMarket value The value of an investment on the statement date. The market value tells you what your investment is worth as at a certain date. Example: If you had 100 units and the price was $2 on the statement date, their market value would be $200.+ read full definition of the “advantage” you gained – effectively a 100% tax.

Two tax-free ways to borrow from your RRSP before your retirement

There are two government programs which allow you to borrow from your RRSP before retirement without paying tax. These are for buying your first home, and to pay for education or training.

1. Home Buyers’ Plan (HBP)

You and your spouse each can borrow up to $35,000 from your RRSPs for a down paymentDown payment The money you put into buying a large item like a car or home.+ read full definition on your first home under the federal government’s Home Buyers’ Plan (HBP). You won’t pay any tax on the money as long as you pay it back over the next 15 years.

2. Lifelong Learning Plan (LLP)Lifelong learning plan (LLP) You and your spouse each can borrow up to $20,000 from your RRSPs to pay for full-time or part-time education or training expenses under the government’s Lifelong Learning Plan (LLP). The maximum you can take out in any year is $10,000. You won’t pay any tax on the money as long as you pay it…+ read full definition

You and your spouse each can borrow up to $20,000 from your RRSPs to pay for full-time or part-time education or training expenses under the government’s Lifelong Learning Plan (LLP). The maximum you can take out in any year is $10,000. You won’t pay any tax on the money as long as you pay it back over a period of 10 years.

If you use the HBP or LLP, you should have a plan to repay the amount in the required period of time.

An alternative to the RRSP Home Buyers’ plan is the First Home Savings AccountSavings account A bank account intended for depositing funds. Pays interest and lets you withdraw cash at any time.+ read full definition (FHSA), first available in 2023. If you’re planning to save for a home, consider if the HBP or FHSA is the right choice for you.

Summary

Saving in an RRSP can help provide you with a regular stream of retirement income. There are ways to withdraw money before you retire, but you should be aware of the tax consequences:

  • If you take money out early from your RRSP, you pay a withholding tax, and you may have to pay additional tax when you declare it as income on your tax return.
  • You can withdraw money — tax-freeTax-free Money that you do not pay tax on.+ read full definition — from your RRSP if you use it to fund your education or buy your first home through a federal program.
  • When it comes to getting income from your RRSP, you can convert it to a RRIF, an annuity or both.

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