Yesterday I discussed the Lifelong Learning Plan, were you can withdraw money from your RRSP for educational purposes. What if you need to withdraw more money from you RRSP to go back to school? What if you wanted to supplement a maternity leave with money that is in your RRSP? Or in the case of a job loss, you might also need to pull money out of your RRSP.

In all three of these examples, your income will be lower than when you were working full time. You may have no income at all. Not only can an RRSP provide some much needed income in these situations, there could be a tax savings as well.

As an example, if you have an income of $50,000 in Alberta, the marginal tax rate would be 32%. If you had made $10,000 in RRSP contributions at this rate for a couple years, the tax refund would total $3,200.

Now say you wanted to go back to school or you lost your job. Maybe your income so far for the year is $20,000. If you needed to withdraw that $10,000 from your RRSP, it would be taxable income at a tax rate of 25%, or $2,500. In this example you would have saved $700 in tax, and more importantly, allowed yourself to go back to school or survive a job loss.

If your income for the year is at $0 then you wouldn’t pay any tax on the withdrawal since it is less than your basic personal amount. You would however be subject to the withholding tax by banks, but you would get this amount back as a tax refund if your income remained that low for the entire year.

However, there are a few negatives to withdrawling from your RRSP before retirement. You will not get this contribution room back and would be giving up the potential growth of the investment.

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Related Posts:

• How To Use Spousal RRSPs To Split Retirement Income
• Lifelong Learning Plan (LLP)
• TFSA – Tax Free Savings Account