Can you avoid paying taxes on RRSP withdrawals?
Generally, when you withdraw money from your RRSP, you pay taxes upfront (withholding taxes) and may owe even more taxes when you file your tax return.
Registered Retirement Savings Plans (RRSPs) are useful for investing toward retirement on a tax-deferred basis. However, when you dip into the pot to take out money, the taxman (CRA) shows up to take their cut.
Are there ways to withdraw money from your RRSP without paying tax or facing a penalty? Read on to find out.
How To Withdraw RRSP Money Tax-Free
There are 3 ways to take money from your RRSP and pay no taxes.
1. Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows Canadians to withdraw money tax-free from their RRSP to buy or build a home. You can borrow up to $35,000 or $70,000 in the case of a couple with RRSPs.
To qualify for the HBP, you must be a first-time homebuyer (i.e. not owned a home in the last four years). You must also complete Form T1036.
You have 15 years to pay back the full amount withdrawn into your RRSP, with the first payment due 2 years after your withdrawal.
The minimum annual HBP repayment is 1/15th of the amount borrowed. Assuming you withdrew the full $35,000, you must repay at least $2,333.33 per year.
When you don’t make the minimum repayment, the deficit is added to your income for the year and taxed.
Here are more details about the Home Buyers’ Plan and how it works.
2. Lifelong Learning Plan
If you are considering returning to school, the Lifelong Learning Plan (LLP) allows you to withdraw tax-free money from your RRSP to fund your education.
You can withdraw up to $10,000 per year and up to $20,000 in total over a 4-year period (or up to $40,000 for a couple).
To qualify for the LLP, you must be enrolled full-time in a qualifying educational program.
Monies withdrawn under the LLP must be repaid within 10 years, with a 1/10th minimum repayment per year. If you do not make the minimum payment in a year, the deficit is added to your income and taxed.
Interestingly, Canadians can use both the HBP and LLP at the same time.
Learn more about the Lifelong Learning Plan.
3. Withdrawals with Low or No Income
During years when you have little to no income from other sources, an RRSP withdrawal may result in a minimal or zero tax bill.
Here’s how this works:
When you withdraw money from your RRSP, your financial institution withholds tax on behalf of the CRA, regardless of your tax bracket or income level.
At tax time, you don’t pay taxes on the federal/provincial basic personal amounts. For example, the maximum federal basic personal amount for 2024 is $15,705.
If your RRSP withdrawal is $15,705 or less (not considering other tax credits, etc.), and you don’t have any other income, you won’t pay federal income taxes.
Given this scenario, you can expect a tax refund.
From the provincial side of things, let’s use Ontario as an example.
Ontario’s basic personal amount is $12,399 in 2024. Income below this amount will also result in $0 provincial taxes for the 2024 tax year.
Check your provincial tax rates here.
If you plan to withdraw money from your RRSP before retirement, a good strategy is to do so in low-income years.
Costs of Early RRSP Withdrawals
Unless you are taking RRSP money for the HBP or LLP, you are likely going to pay taxes. There are also other downsides to withdrawing RRSP funds early.
Let’s start with the tax hit.
RRSP Withholding Tax
Your financial institution withholds tax on the amount you withdraw as follows:
| RRSP Withdrawal | Tax Withheld Outside Quebec | Tax Withheld in Quebec |
| $0 – $5,000 | 10% | 5% |
| $5,001 – $15,000 | 20% | 10% |
| $15,000+ | 30% | 15% |
Québécois also pay a provincial sales tax.
If you are a non-resident of Canada for tax purposes, a 25% withholding tax is applied.
Depending on your marginal tax rate (tax bracket) at the end of the year, you may still owe federal and provincial taxes that are due by April 30th.
The other downsides to dipping into your RRSP before retirement are:
Loss of Contribution Room: When you take money out of your RRSP, which is unrelated to HBP or LLP, you lose the contribution room forever. You can’t add it back at a later date.
Loss of Tax-Deferred Growth: Withdrawals mean you have lost out on long-term investment growth. Even for HBP and LLP withdrawals, every day that passes by is a lost opportunity to potentially grow your retirement savings.
Lurking Penalties: If you forget or cannot make the minimum LLP or HBP repayments, the outstanding amount is added to your annual income, resulting in tax owing and lost contribution room.
How To Avoid RRSP Withdrawals and Penalties
If you need money, consider withdrawing from your TFSA first. TFSA withdrawals are tax-free, and you can recontribute the funds in future years.
Plan to have an emergency fund to pay for surprise costs and expenses. You can hold your emergency funds monies in a high interest savings account or TFSA and earn interest.
I fund my emergency fund through various side hustles.
If all else fails, see whether a personal loan or line of credit is a better alternative than raiding your RRSP.
RRSP Withdrawal FAQs
When you take money out of your RRSP for a home purchase (Home Buyers’ Plan) or educational costs (Lifelong Learning Plan), you don’t pay taxes and can re-contribute the amounts to your RRSP in later years.
Taxes are withheld immediately when you make an RRSP withdrawal (outside of the HBP and LLP). If you are in a low-income tax bracket, the taxes withheld may be refunded when you file your income tax return.
Yes, RRSP withdrawals are subject to taxation at any age based on your marginal tax rate. If you choose to close your RRSP at age 71 by withdrawing the amount in cash, withholding taxes apply, and a further tax bill could show up at tax time.
Are there other ways to take out RRSP funds and avoid the immediate tax hit? Let us know in the comments.
To Fred, once you have removed (in total withdrawals for any given year), the higher withholding tax will kick in. So, on the second day, you will have instead of 10% (outside Quebec) on the first 5,000, 20% on the second day’s withdrawal, and then, on the third day, at 15000 total withdrawals for the year, you will still be at 10%, but on the fourth day (or the minute you go over 15,000, the withholding tax will be 30%. Moreover, at tax time, with high (other) income, you will likely have to pay the higher tax rate (above the 10% and 20%) for the first 15,000. Personally, I want to aggressively draw down my rrsp so that my estate doesn’t get a huge tax bill at the end of my life. If I keep the TFSA full and fully invested, and have a cash account for investment, won’t this be better, tax wise, than an rrsp?
I am wanting to dissolve my Rif what is the best way?
@Karen: Best to chat with your financial institution. Withdrawal rules apply, however, you should be able to transfer to another bank, if that’s your plan.
Can I remove 5000 per day from RRSP to keep with-holding tax down to 10%?