Our series on RRSP Basics continues today with some information on how and when to take money out of your RRSP.
Life is not long, and too much of it must not pass in idle deliberation how it shall be spent.
~ Samuel Johnson
Withdrawing Money Before You Retire
The idea behind RRSPs is that you won’t be taking any money out until you retire. But as we all know, life happens. Here’s how it works if you encounter an emergency where you absolutely need to take some of your money out:
- Any money you take out of your RRSP will be added to your income at your marginal tax rate in the year you withdraw it.
- Your withdrawal will be subject to a withholding tax which will be deducted by your financial institution. The withholding rates for Canadian residents are as follows:
- 10% (5% in Quebec) on amounts up to $5000
- 20% (10% in Quebec) on amounts above $5000 up to $15000
- 30% (15% in Quebec) on amounts above $15000
*Note that you will eventually still be responsible for paying tax on your withdrawal at your marginal rate, whether that is higher or lower than the amount of withholding tax you are charged.
- If you withdraw money from a spousal RRSP, it will be taxed in the hands of the contributor if he/she made contributions to any spousal RRSP in the year of withdrawal or either of the 2 previous years. Otherwise, the withdrawal will be taxed in the hands of the annuitant (the receiving spouse). The money can generally only be withdrawn by the annuitant.
- When you withdraw money from an RRSP, you do not get that contribution room back again.
Withdrawing Money in Retirement
- You can continue to contribute to an RRSP up until December 31st of the year in which you turn 71.
- You can continue to contribute to a spousal RRSP for your spouse or common law partner until December 31st of the year in which he/she turns 71.
Once you reach the magic age of 71, you have several RRSP options:
- Withdraw the money from the RRSP: This money would be subject to withholding tax and taxed at your marginal tax rate in the year of withdrawal as outlined above.
- Transfer the money to a Registered Retirement Income Fund (RRIF): If you choose this option, there is no tax on the money you transfer, but you will pay taxes on any money you withdraw or receive from the RRIF.
- Use the RRSP money to purchase an annuity for life: Life annuities pay you a prescribed amount each year until you die.
- Use the RRSP money to purchase an annuity spread over a certain number of years: Term annuities pay you a prescribed amount each year for a certain period of time.
Starting the year after you set up a RRIF, you receive a minimum amount each year using a formula based on your age and the value of your RRIF. Of course the whole aim of retirement planning is to run out of life before you run out of money. In many ways, this requires that we are able to predict the future. None of us knows the number of days in our lives. We just need to plan based on what we know now and do our best to hedge against all possibilities. There is no way to get it exactly right unless you are clairvoyant.
Have you done the math yet to figure out what your retirement income might look like?