Earlier this week, when discussing withdrawing RRSPs before retirement, I mentioned withholding tax but never went into detail. Withholding tax is the amount that the bank is required to submit to the CRA on your behalf. Since withdrawn RRSPs are considered income in that year, the withholding tax is similar to your employer withholding a portion of your income to submit for your tax obligations.
There are three levels of percentage withheld, depending on the amount of your withdrawal:
- Up to $5,000 will have a 10% withholding tax
- $5,001 to $15,000 will have a 20% withholding tax
- $15,001 or more will have a 30% withholding tax
Obviously there is a benefit to keeping your individual withdrawls to $5,000 or less. While it can be beneficial to have access to more of your money throughout the year, keep in mind that this is not your tax rate. Your marginal tax rate for the year could be 20-50%, you could end up owing the government quite a bit more come tax time than the 10% you have paid so far. If you are withdrawing RRSPs for retirement, or any other time you are in need of income, you should know your marginal tax rate so that you will be prepared for the amount of tax you will still need to pay. TaxTips has personal income tax rate tables to show you this percentage by province, by income range.
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What are the rules for making several RRPS withdrawals through the year in the mount of $5000 each.
Ray Fortier,
That’s what you need to watch out for when withdrawing. If you were to withdraw multiple amounts of $5,000, only $500 (10%) would be withheld for taxes. But come the end of the year, you’re going to owe based on the total. So while only 10% was withheld, depending on the total income for the year you might had a tax rate of maybe 30%. Whatever the amount, you will owe based on the total.
That said, there’s still a benefit to taking out the money $5000 at a time. It’s basically an interest free loan from the government, since you won’t have to pay your full taxes until the spring.
I deal with Scotia McLoed and they add up your $5,000.00 withdrawals. The first is a 10% withold, the second and third will be a 20% withold each and any further $5,000 will see a 30% withold. They claim CRA requires this practice.