Explore the RRSP Lifelong Learning Plan (LLP) – a strategic approach for financing your education or your partner's. Discover annual withdrawal limits, repayment conditions, and ensure informed decisions for long-term financial and educational goals.
RRSP 301: Strategically Plan Your RRSP Withdrawals
Key Takeaways:
- Choose the most suitable RRSP withdrawal method to minimize tax burdens.
- RRIF and life annuity are two flexible withdrawal options after the maturity of RRSP, which can be chosen based on individual circumstances.
- Utilize the Homebuyers’ Plan and Lifelong Learning Plan within RRSP to achieve tax-free withdrawals under specific conditions.
RRSP (Registered Retirement Savings Plan) is an excellent tax-advantaged program that provides individuals with a solid preparation for retirement. However, when enjoying these tax benefits, it is crucial to pay attention to key factors when withdrawing funds from RRSP. This blog will delve into the methods of withdrawing RRSP funds, along with corresponding tax implications and strategies.
When can I withdraw RRSP funds?
As long as your RRSP is not locked-in, you can withdraw funds from the account at any time before the last day of the year you turn 71. On the last day of the year you turn 71, your RRSP matures. At this point, you must close your RRSP account.
Withholding Tax
We all know that when you contribute to your RRSP, both your contributions and the investment growth within the RRSP account are tax-free. However, when you withdraw funds from the RRSP account, the withdrawn amount is considered as income for the year, requiring payment of applicable taxes. To ensure tax payment, the Canada Revenue Agency (CRA) mandates your financial institution to withhold a portion of the funds as withholding tax, remitting it to the CRA. When filing taxes, the CRA will calculate your final income taxes based on your annual income. The withholding tax rate varies depending on the withdrawal amount and the province of residence. If you are currently a resident of Ontario, your withholding tax rates will be as follows:
- 10% on withdrawal amounts up to $5,000
- 20% on withdrawal amounts of $5,000 and over, up to and including $15,000
- 30% on withdrawal amounts over $15,000
Methods of Withdrawing Funds when RRSP Matures
As many individuals still hold substantial balances in their RRSPs at the age of 71, opting for a lump-sum withdrawal may result in a tax rate higher than the current year’s highest marginal tax rate. This could lead to a situation where the withdrawal tax rate is higher than the tax rate at the time of contribution. To avoid this scenario, you can choose between the following two methods for withdrawing funds from your RRSP:
1. Convert RRSP to RRIF (Registered Retirement Income Fund)
If you convert your RRSP to a RRIF before maturity, there is no need to pay withholding tax for the conversion amount. When you withdraw funds from the RRIF account, the withdrawal amount will be considered as income for the current year, subject to applicable taxes. It is important to note that RRIF has a minimum withdrawal requirement each year, and even if you do not wish to withdraw, a certain amount must be taken out annually from the RRIF account. If the investment return on the RRIF is lower than the withdrawal rate, it may eventually deplete the entire RRIF balance.
2. Purchase a Life Annuity
If you desire to secure a lifetime income for retirement, you can utilize the balance in your RRSP account to acquire a life annuity. When opting for this method, the RRSP withdrawal amount for the annuity purchase is not subject to withholding tax. However, once you commence receiving annuity payments, the annual payments will be deemed as income for the current year and will be subject to taxation accordingly.
Other Withdrawal Methods Before RRSP Maturity
In addition to the aforementioned withdrawal methods, if you have educational or homeownership needs, you can also “borrow” funds from your RRSP through the following plans. As long as you repay the withdrawn amount into your RRSP account within the specified period, the withdrawal will be tax-free.
1. RRSP Lifelong Learning Plan (LLP)
If you are planning for post-secondary education or training, the RRSP Lifelong Learning Plan may be beneficial. RRSP LLP allows you to withdraw funds from your RRSP to pay for full-time training or education for yourself, your spouse, or common-law partner. You can make withdrawals from your RRSPs until January of the fourth calendar year after the year you made your first LLP withdrawal, as long as you meet LLP conditions each year. The annual withdrawal limit is $10,000, and the total limit is $20,000, to be used for qualifying educational expenses. You have a 10-year repayment period to repay the borrowed amount. As long as you repay the loan back into the RRSP account according to the government’s schedule, the withdrawal will be tax-free.
2. RRSP Home Buyers’ Plan (HBP)
If you have not yet purchased a home, the RRSP Home Buyers’ Plan may help you achieve the dream of first-time homeownership. RRSP HBP allows you to withdraw up to $35,000 from your RRSP for the purchase of a qualifying property. You have a 15-year repayment period to repay the borrowed amount. As long as you repay the loan into the RRSP account according to the government’s schedule, the withdrawal will be tax-free.
In conclusion, withdrawing funds from RRSP requires careful consideration, and choosing the right method can minimize tax implications. By understanding different withdrawal strategies, you can better plan the use of your retirement funds, ensuring greater financial freedom during your retirement years.
For more RRSP-related articles, please visit our RRSP Registered Retirement Savings Plan Guide.
Published Date: February 21, 2020
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