Withholding Tax on RRSP Withdrawals

One of the benefits of RRSPs is the flexibility you have to withdraw some of the money before retirement. However, even though you can withdraw money from your RRSP prior to retirement, it doesn’t mean that you should. The action comes with a cost. That cost is a withholding tax.

Withholding tax is the amount that the bank is required to submit to the CRA on your behalf. When you withdraw money from your RRSP, you are required to pay taxes, and the bank takes a portion of your withdrawal and sends it on.

How Much Withholding Tax Will You Pay?

Since withdrawn RRSPs are considered income in that year, the withholding tax is similar to your employer withholding a portion of your income to submit for your tax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% (5% in Quebec) withholding tax
  • $5,001 to $15,000 will have a 20% (10% in Quebec) withholding tax
  • $15,001 or more will have a 30% (15% in Quebec) withholding tax

Withholding Tax on RRSP WithdrawalsNon-residents of Canada pay a withholding tax of 25%, except in places where that amount is reduced by treaty. Living outside of Canada, then, could cost you if you decide to withdraw your RRSPs.

Obviously there is a benefit to keeping your individual withdrawls to $5,000 or less. You will pay less in withholding tax. However, if you need more money, it may not matter, and you will have to pay the higher amount in tax.

While you might think it’s beneficial to have access to more of your money throughout the year, thanks to your RRSP, keep in mind that this is not your tax rate. You will still owe your regular income taxes on top of the withholding tax come April 30.

If your marginal tax rate for the year is 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.

Other Costs of Withdrawing RRSPs

The cost of your withholding tax, and the cost of taxes paid on your withdrawal as income, aren’t the only costs associated with withdrawing RRSPs. You also have to consider the opportunity cost.

Once you withdraw that money from your account, it is no longer working on your behalf. You no longer have that capital in your account building your wealth. You can’t get that lost time back, and the interest you would have earned, even if you replace the capital later.

Before you decide to withdraw your RRSPs, make sure that you consider all of your options. Consult with a knowledgeable financial professional who can help you figure out the best way to go about making your withdrawals, and who can help you plan for your tax payments.

Written by Tom Drake

Tom Drake is the owner and head writer of Canadian Finance Blog. While you’re here, consider signing up for the RSS feed or email subscription. Both deliver the latest articles directly to you! You can also follow me on Twitter for all the latest posts or to send me any comments or questions!

26 Responses to Withholding Tax on RRSP Withdrawals

    • 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.

  1. 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.

    • I deal with ATB Securities and they have just told me the same thing. They said because I did two withdrawals in a 35 day period, it was 20% tax withheld. I am challenging that as I have been unable to find anything on the CRA’s website for individuals or Plan Administrator that states this is so. I guess I’ll be checking with the AB Securities Commission next!

  2. If someone’s income is below the poverty line and they withdraw what they have in RSPs (below $5000), would the withholding tax paid on the RSP withdrawal be refunded with an income tax return?

    • I have a similar question to Rose. What if your marginal tax rate is lower than the witholding tax rate, will you only be refunded the difference on the withdrawal of funds or will you be charged the full amount of the witholding tax but not charged again at tax time?

      • Hope this helps- not sure how long ago this reply was sent as there is no date on it….

        http://www.cra-arc.gc.ca/tx/rgstrd/rrsprrif-reerferr/fq-eng.html#withholding

        “Payments subject to withholding

        In general terms, a payment from a RRIF in excess of the “minimum amount” is subject to tax deductions at source using the lump-sum withholding rates noted below.

        The withholding amount is normally computed on the excess portion of each individual lump-sum payment. However, if withdrawals are in the nature of instalments made in fulfillment of a single request by the annuitant, it is the Canada Revenue Agency’s (CRA) position that the rate of withholding on each individual payment should be based on the total sum requested and not on each individual payment. In these situations, the CRA considers these periodic payments to be blended payments (i.e. part minimum amount and part instalmentor excess). Accordingly, the latter portion would be subject to withholding tax at the rate that would apply had the annuitant ‘elected’ to receive one lump-sum payment in the year equal to the amount by which the total instalment payments in the year exceed the minimum amount for the year.

        In a situation where an annuitant receives monthly instalment payments and submits a request for an additional amount during the year, the CRA views this as a separate request and only requires withholding on the excess portion of that specific payment regardless of the amount of the ongoing instalment payments. However, where it appears that an annuitant is making separate requests in order to minimize the income tax withheld, for example, where a series of requests are made in a short period of time, it is our position that the withholding rate should be determined as if there was one request equal to the total of all amounts requested. Thus, a higher withholding rate could apply. We suggest payers use their discretion since it is sometimes difficult to apply these rules in these situations.

        Note: It may be advantageous to the annuitant’s overall tax liability if the tax rate applicable to the aggregate of the payments for the year is used rather than the lower rate determined on the additional withdrawal.

        Use the rates listed under the heading “Withholding Rates.” “

  3. Hi Tom,
    I was hoping you could give me a little insight on my GIC. I had a GIC at the TD (truly disgusting) Canada Trust bank mature after 5 years in the amount of 1413.91. It made ZERO interest in that time. Once I was finally able to unlock it, they took 243.09 off of the total, that is over 17% in tax. My bank is not giving me any answers so I hope you could tell me if that is correct or not.

    Thank you very much,
    Sherry

  4. I have an interesting question. I’m a person that likes to work for a few years, then quit and travel on my savings for a few years. I’m thinking about using an RSP to “average out” the taxes I pay. I’ll show you what I mean, using round numbers and rough estimates to keep the math easy.

    Option 1) Lets say I earn $100k for three years, paying 40% tax, meaning I’ve paid $120k in tax in the 3 years. Then I travel for 3 years, so I’ve paid $120k in taxes over 6 years and have $180k in “savings”. (obviously not taking into account expenses while earning the money – kind of irrelevant to this discussion)

    Option 2) While working, I contribute the maximum allowable amount each year to my RSP (let say $20K/year), so I pay taxes on $80k a year (which might be 30% or $24k) so after three years I’ve paid $75k in taxes, have $60k in RSP and $165k of “savings”. For the next three years I quit (thus earning $0), but withdraw $20k a year from the RSP, meaning my only taxable income is the $20k withdrawal from the RSP, which I pay low tax on, lets say 20% or $4k.
    So after 6 years I’ve paid a total of $87k in taxes and will have $213k to spend.

    If that works (roughly) I will have “averaged” my income over the 6 years and reduced the amount of tax I paid by roughly $33k.

    Will that idea work?

    Thanks,
    -Dan

    • I was just looking for the same information as Dan above. My husband and I work for a few years and then travel for a few years with our family and we were wondering if contributing to them and then using during our traveling years would be a smart idea. We would plan to withdraw only just about the poverty line for a family each year. I would love to hear the answer to Dan above.

      Thanks
      Danielle

      • Hey Danielle,

        (I’m the same Dan you’re replying to)
        I’ve been doing a ton more research into this, and I think I can help you with an answer.

        I found a blog a while ago which actually suggested doing what I proposed if you have an income that fluctuates (they gave the example of a contractor, or a laborer that has boom and bust years). Sorry, I don’t have the link, but it was nice to see someone else confirming the idea.

        Anyway, I asked at all my local banks, etc. and they basically get a blank look on their faces and don’t really get the whole point. The long and short is you can absolutely do what I suggested, it will work exactly as I suggested. I’ve been running the numbers every which way I can, and it looks like this is going to save me about $8k-$9k in taxes every “working” year, if I then withdraw only $10k from the RSPs in my “non-working” years (the first $10k is completely tax free).

        There are a couple of things to keep in mind:

        1. (This is the biggest downside). The amount you can contribute to RSPs is based on your income (18% to a max of $18k), and you never get to re-contribute anything you withdraw. So lets say you put in $15k for three years, then take that same amount out over the next three non-working years. When all is said and done, you’ve taken $45k out of your RSP that you’ll never be allowed to put back in. Anyone doing “long term” retirement planning will tell you this is a bad thing, because it means you’ll have less in your RSP when you finally decide to retire. I don’t care, because of the way I work on/off, etc., I’m not planning on ever “retiring” in the traditional sense. (I’ll work when I have to, and not when I have to, even after 65)
        You should think hard about if this is a concern to you.

        2. This whole plan of work/non-work will never be recommended to you, and you’ll probably never find anyone that can answer the question about using your RSPs to average out your taxes over many years. This is not the recommended approach, so they are going to try and tell you you should be working your entire life until retirement, when you want to have as much in there as possible. Keep that in mind when getting advice.

        Otherwise, yes, it will absolutely work.

        -Dan

        • Hello Dan,

          Thanks for your answer. I believe I messaged you on facebook. Sounds like we live a similar lifestyle. Hubby and I dont plan on Retiring the traditional way either. I was just wondering if we could use this method for a tax break and in our lean years take it out by minimizing our withholding percentage.

          • Also should have said you answered my question perfectly. I appreciate it very much. I have come across mention of this in various finance magazines but never with any details. Upon asking a financial advisor they said they hadn’t heard of such a thing. So thank you for investigating this for us folks who live a little outside of the box.

        • Please also look into Tax Free Saving Accounts. Any money you put into them can be withdrawn tax-free, and your next-years contribution limit increases by the amount you took out. I buy U.S. dividend paying equities from my TFSA, and I let all the dividends accumulate. I will be able to withdraw them and use them to live off, without paying any taxes. A small caveat… U.S. paying dividends are currently subject to a 15% withholding tax at the source. But hey, the stock I am holding is paying 15% right now, so my real tax is 15% of 15%. I am still making round 13% after taxes. Compare that to banks, paying 2% or less.

          • Brain,

            The huge difference is you are still paying income tax on the money before you put it into your TFSA, which for me is ~30%.

            With an RSP, you don’t pay income tax on the money, so if you stop working and pull the money out at less than $10k a year, you’ve not paid a cent of income tax on that money earned.

          • You’re right, of course Dan. I’m just talking about after your RRSP’s deductions are max’d out.

        • Thank you Dan. I have been searching the entire length and breadth of the internet for this topic and answer. I have spent the last three years maxing out my RRSPs during my boom years with an internet based company and now I am going to withdraw against by RRSPs this year in what I think to be a zero income year.

    • Hi Dan,

      I have had 2 clients do this now. One is a doctor who travels to Africa every couple of years and use his RRSPs to pay his bills in Canada while he is gone. The 2nd is an artist who lives in Florida for the winter and creates her artwork and then returns to Canada for a few months selling her art to fund her living expenses and replenish her RRSPs.
      We just convert funds into a RRIF to stream the income as they need.
      Obviously both non-traditional structures but they also were able to build significant non-registered savings to have for future “retirement” needs.

  5. Off topic. I am searching for an answer. I am looking to claim hardship and withdraw a portion of my RRSP. My income is tax free and wondering when applying does it mean my income will be considered 0?

  6. I am a Canadian citizen living and playing taxes in the US. If I cash-in my RRSPs, do the banks still with-hold the 30% for the Canadian government? Seems like I would need to claim the full amount on my US tax return.

    Any information on this process would be appreciated.

    Brent

  7. I repeat Rose’s question (modified), as in 2011, I paid a $77 withholding tax on a $770.00 RRSP that was moved into my Credit Union chequing account. I expected that this would be refunded after submitting my 2011 return, and made a reference to the tax in a note. My net income was only $1550.00, and I owed no income tax, but the CRA ignored my question and made no reference to this withheld tax on my 2011 assessment.

    “If someone’s income is below the poverty line and they withdraw an RRSP (below $1000), should the withholding tax paid on the RRSP withdrawal be refunded with an income tax return?”
    and I also ask: Is there a special form or schedule to complete to apply for refunds of withholding taxes such as the type described in the previous question?

  8. with my eldest son finishing his college and my next one going to university this coming year, I am feeling a bit broke financially speaking. I have a basically what they called locked RRSP thru my company group plan and standard life told me I cannot do anything, cannot withdraw any money because is under government legislation. I need to get some debt free and trying to visit my mom back home in Ecuador but can’t ’cause is very difficult and have not been back since 5 years ago. Is there anything I can do to get some of my money withdrawn to pay some stuff and get flight tickets?.. Really need help…thanks.. Henry

  9. I am a Canadian citizen and currently living with my husband and daughter in US. I am not working since last couple of years but used to when when I was in Canada. I have some RESP savings back in Canada. What will be my tax liability if I withdraw that money?

  10. I am retired and withdrawing a max amount to maintain my oas from clawback. I am dealing with td financial with my RRIF.
    I can not find out if when I take a monthly withdrawal if they are remitting the tax withheld monthly or working on this capital until the new year. All the while the government is asking me to pay additional tax three times a year. I am not doing this as I would be paying twice. What are the regs regarding banks or trust co. around remitting tax withheld from a riff. Tks G.

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