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 Since withdrawn RRSPs are considered income in that year, the withholding tax is similar to your employer withholding a portion of your income to submit for your tax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.
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!
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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?
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
Hi Tom,
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