5 things to think about before taking money from your RRSP.

January 13, 2017

When things aren’t exactly stable and you’re navigating a tough financial situation, your RRSP can start to seem like a pretty attractive source of funds. Before you decide to withdraw money, it’s good to understand the impact it could have on your tax return. Here are 5 things to consider:

1.You could lose your tax shelter

RRSPs are designed to help Canadians save for retirement and provide a place for you to move a portion of the income you earn today to be exempt from any taxes. This is also described as a tax shelter, so when you make a withdrawal, you lose your shelter benefits.

2.Watch for additional taxes, because whatever’s withheld might not be enough

When you make a withdrawal from your RRSP, the financial institution that manages your plan is required to withhold a certain percentage of tax, based on the amount of the withdrawal:

  • 10 % (5% in Québec) on amounts up to and including $5,000
  • 20 % (10% in Québec) on amounts over $5,000 up to and including $15,000
  • 30 % (15% in Québec) on amounts over $15,000

For amounts held in Québec, provincial tax will also be withheld. Even though this tax is taken off your withdrawal at the time, the amount withheld at source isn’t usually enough to cover your final tax liability on the draw.

3.Withdrawals are considered income

The money you withdraw from an RRSP is considered income in the tax year it was received. You’ll need to add it to the other income you earned during that year on your tax return.

4.You’ll lose contribution room

Once you withdraw money from your RRSP, that contribution room is lost. You can’t replace the funds at a later date.

5.Withdrawals without penalties

The Home Buyers Plan (HBP) and Lifelong Learning Program (LLP) will allow you to withdraw funds from your RRSP without any penalties, as long as they’re paid back within the appropriate time frames. If the funds aren’t repaid, they’ll be considered income.

If you’re thinking about your RRSP as a source of income, remember that any changes you make will affect your return, so make sure you understand the pros and cons.

Ready to file? Visit a tax expert at an H&R Block office near you, or do it yourself with our online tax software.



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