How to withdraw RRSP without paying tax?

August 31, 2022
How to withdraw RRSP without paying tax?

Did you know you can withdraw money from your Registered Retirement Savings Account tax free? If you are someone who likes to save taxes and would like to learn how to utilize these withdrawal methods, we have some great information for you! Let's dive in!

How to Withdraw RRSP Without Paying Tax


1. Home Buyers Plan.

To help people get into homes they can't otherwise afford, the government has created the Home Buyers Plan (HBP), which allows people to borrow money against their retirement savings account (RRSP)without paying taxes or interest. Up to $35,000 in down payment assistance is available for first-time homebuyers. To submit an application, you must be a Canadian citizen or permanent resident.

The HBP scheme has a $35,000 yearly maximum. You and your spouse may each take out $35,000, for a total of $70,000, to put toward the down payment on a property.

Before you may withdraw money from your RRSP, you must provide written proof that you will be using the funds to purchase or construct a house. The individual using the residence must be either you or a family member who is disabled.

A minimum of four years must have passed since you or your spouse/common-law partner owned property in order to qualify as a previous homeowner. You can't utilize the HBP until 2018 if, for instance, you purchased a home in 2010 and sold it in 2013.

You'll need to pay back the loan in full before you can apply for a new HBP. Any RRSP withdrawals made must wait 90 days in your account before being used for an HBP.

The loan has a 15-year repayment schedule, beginning in the year after the HBP's completion. The annual payments will be split in half. For example, if you borrow $25,000 and pay it back over the course of 15 years, your yearly payment will be $1,666.67. In this case, if you owe more than $1,666.67 from your HBP from the previous tax year, the CRA will consider the difference to be part of your taxable income for that year.


2. Lifelong Learning Plan.

Consumers may access their RRSP funds tax-free under the Lifelong Learning Plan (LLP). You or your spouse/common-law partner must utilize the money for educational purposes. The common-law spouse must be the parent of your kid or have legal custody of your child and have managed to live with you for at least 12 months. An LLP can't be used to pay for your or your common-law partner's kid's college tuition.

The program must last at least three months and include at least 10 hours of weekly study (not counting homework or travel time). Additional withdrawals may be made at any time within four years after the first withdrawal. Those who begin withdrawing in 2020 will have until 2024to completely deplete their account.

Withdrawals are capped to $20,000 over the course of two years, or $10,000 each year. An LLP may be used by you and your spouse or common-law partner simultaneously without reducing either of your individual contribution limitations.

Withdrawals from an LLP must be reimbursed to the RRSP within ten years and in even-numbered years. In other words, if you pay more than you have to one year, you may have a lower payment the next.

You may enjoy the benefits of the LLP numerous times, but you must refund the cash before you borrow out of your RRSP again. You might take up to ten years to pay back the money. Once you are no longer an eligible student upon your first LLP withdrawal, repayment will begin regardless of when you took out the loan.

Withdrawing RRSP contributions for an LLP requires that they have been in the account for at least 90 days. 


3. Having a poor or nonexistent income.

Withdrawals from a registered retirement savings plan (RRSP) may be subject to a reduced tax rate or even be tax-free if your taxable income for the year is minimal or nonexistent. Although you can't withdraw the whole amount tax-free as you may with HBP or LLP, you will get your money back after submitting your taxes for the RRSP withdrawal tax that was levied at the time of withdrawal.

In 2022, the standard deduction for an individual is $14,398. For the sake of argument, let's say you take $10,000 out of your RRSP in 2022 and have no other means of support. Your banking institution will withhold taxes on your behalf and send them to the Canada Revenue Agency (CRA). If your yearly income was less than $14,398 and you submit your taxes in a timely manner, you will be eligible for a tax refund.

If you earn zero income and your RRSP withdrawals are less than the provincial basic amount, your provincial tax will also be $0. For the 2022 tax year, the basic personal amount in British Columbia is $11,302. You may expect reimbursement of the RRSP withholding tax taken from your withdrawal when you file your taxes. Besides that, you could be entitled to federal and provincial tax credits and deductions that might enhance your tax refund.

It's best to cash out your RRSP during relatively low or no-income years if you intend to minimize your taxable withdrawals.


What early withdrawal means

By participating in either the LLP or HBP programs, you may put your money to work without paying taxes or incurring interest charges. Using your RRSP to pay for things like tuition or adown payment might have some unintended consequences.

When you take a loan from your RRSP, the borrowed funds are removed from your taxable account and cannot accumulate interest. Withdrawing money from a retirement savings plan reduces the compound interest and growth of that money. While you won't have to fork up any interest when you take money out of your RRSP, you also won't be able to earn any on it in the future.

Problems arise if you cannot afford to return the RRSP. Borrowing $10,000 from an RRSP to fund an LLP or HBP would need $1,000per year in payments for ten years. If you owe $1,000 in taxes but can only afford to pay $500 this year, the government will count the remaining $500 as income.

Make sure you can afford the payments before taking out a loan from your RRSP. Try making those payments every month to determine whether they fit into your budget.

You may use money from a savings account, such as a Tax-Free Savings Account, to make up for missed RRSP contributions if you find that you either can't afford them or don't want to intentionally undermine your retirement savings (TFSA). You may access your TFSA funds whenever you choose, tax-free. You have complete access to your funds and may withdraw as much as you want.

TFSAs have a maximum yearly contribution limit of $6,000 for 2022. Withdrawing funds from your TFSA will increase your annual deductible contribution limit for the following year by the amount removed.

Weigh the benefit and drawbacks of enrolling in an HBP or LLP before making a commitment. It's possible that you'll have to renounce retirement benefits, which might delay your retirement date. You'll be taking out another loan at the same time. Be sure to do the math and thoroughly understand the commitment you're making.


How to Withdrawal RRSP Without Paying Tax FAQ

When can you withdraw from an RRSP?

RRSPs are tax-deferred savings accounts that maybe accessed at any time. There are instances when you need to withdraw money because you're just out of the fund. You may withdraw money as long as you pay the required withholding tax.

Can you use your RRSP funds before you turn65?

Yes. You are not obligated to leave your job when you turn 65. At a younger age, you may start withdrawing your retirement money. If you choose, you may remain working and let your RRSP savings grow with interest and dividends. The sole requirement is that your RRSP be settled by December 31 of the year in which you turn 71.

How much tax is there on an RRSP withdrawal?

To be more precise, the amount of money you remove from your RRSP determines the percentage of tax that must be withheld.

The withholding tax is:

  • Withdrawals up to $5,000 are subject to a 10% penalty.
  • 20 percent on sums between$5,001 and $15,000
  • Withdrawals above $15,000 incur a 30% penalty.

You may reduce your tax burden by making several withdrawals. For instance, let's say you need $9,000 to replace the roof on your home. You may make two withdrawal requests, each for $5,000. There will be a $1,000 withholding tax deducted from the $10,000, leaving you with $9,000 to spend on the roof.

Withdrawals of up to $5,000 per spouse from a joint RRSP account are permitted. Once again, this reduces your taxable RRSP withdrawals.

However, you should weigh the consequences of withdrawing carefully. If you often remove money from your account, your bank may start charging you a fee. Therefore, to calculate the whole price, the charge and the withholding tax must be added together.

The money taken out of your RRSP counts as income, so be sure to include it when you submit your taxes. The tax that is withheld from your RRSP contribution is refundable. But it's possible that your tax bill may increase. In the above example, if you are in the 20.5 percent tax bracket, a 10 percent withholding tax on a withdrawal of $5,000 is unlikely to be sufficient to meet your tax liability.

How to withdraw RRSP early?

Contact your RRSP provider to find out whether your funds are locked in. Unrestricted RRSP funds may be withdrawn whenever needed. Any time prior to retirement, you may take money out of your RRSP, but doing so will result in a tax penalty. On your tax return, enter the amount you received from an early RRSP withdrawal on line 12900.

Under what circumstances may RRSP funds be withdrawn without a financial penalty?

You may start taking money out of your RRSP whenever you choose, but remember that you will owe taxes on that money. The assets in your RRSP must be withdrawn in a lump sum when you reach 71 (on December 31 of the same year), or converted to a Registered Retirement Income Fund (RRIF), or used to buy an annuity.

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