RRSP Basics – Age of Withdrawals, Rules, Taxes and Other Info

I am finding basic, easy-to-understand information about the RRSP hard to decipher on the internet between the Canada Revenue Agency and even bloggers.

As there aren’t many Canadian bloggers, I figured I’d step up and tell you what I have learned in a simple to understand manner.

FYI

• RRSP (Registered Retirement Savings Plan)
• RRIF (Registered Retirement Income Fund)

RRSP / RRIF is a tax DEFERRED plan, meaning you contribute to it now, you get a tax credit in the year you contribute to it.

When you take out the money from the plan, THEN the income tax triggers for it.

WHAT IS THE RETIREMENT AGE?

The general retirement age is 65 for most people but some, obviously, retire sooner.

The only 2 rules i have found for age is:

• You must convert your RRSP into an RRIF by the time you turn 71.
• You cannot take out money from a locked-in RRSP fund until you are 55.

But really, a retirement age is fluid.

HOW DOES THE GOVERNMENT KNOW I AM RETIRED?

Well it actually, it doesn’t matter if and when you choose to be retired, you can withdraw from an RRSP at any time, it is just that taxes apply no matter what.

At the time of retirement, you could convert an RRSP to an RRIF, and then you are to yourself, and to the government, “retired” as you are no longer saving for retirement, but it isn’t a pre-requisite or necessary to do this step.

See, once you convert all or some RRSP to an RRIF, it’s done. You cannot undo this and go back to an RRSP.

I see it like this — the RRSP is a SAVINGS plan and the RRIF is an INCOME plan. It makes sense that once you are retired, you no longer save for retirement, you need that retirement income.

In any case – withdrawing from an RRSP, converting the RRSP to an RRIF, or waiting until you are 71 to be forced to convert it to an RRIF — it is all the same thing in the end.

You will pay withholding taxes from the federal government based on this chart:

Withdrawal Amount % Federal Tax Withheld
From $0 to $5,000 10% (5% in Quebec)
From $5,001 to $15,000 20% (10% in Quebec)
Greater than $15,000 30% (15% in Quebec)

In Quebec you also get provincially taxed on TOP of this federal rate. O_o I guess that’s why the federal tax withholding is lower just for Quebec, because you will then get another tax on top of it which may in the end, equal out to the rates of the rest of the provinces.

..and then if you have income on top of that when you take out that money, you will be paying income taxes on the whole shebang, which is why they say that RRSPs are for when you retire, so that you have $0 in income and you only pay 10% – 30% of taxes (hypothetically speaking).

The only caveat to this is if it is a LOCKED IN retirement plan, then you cannot do anything with it until you are 55.

IS THE WITHHOLDING TAX ALWAYS APPLICABLE?

Yes from what I have read until the age of 71. By the magical age of 71, you will NOT pay the withholding tax because it will be converted into a mandatory RRIF and the government will choose how much you can take out each year from it, and tax you accordingly.

At any age, at any time before 71, this tax is applicable.

The only two exceptions before the age of 71 to take the money out without paying this tax are borrowing for the Home Buyer’s Plan (your first home only), or for Education. You can withdraw money from the RRSP tax-free, but you must repay back the amounts within 10-15 years (15 years for the home plan, and 10 for the education one).

WHEN DO I HAVE TO CONVERT AN RRSP TO AN RRIF?

It is mandatory that you convert your RRSP into an RRIF at the age of 71. You do not have to claim it as income until the year you turn 72.

At this point you cannot go back to an RRSP and earn a salary to re-contribute to an RRSP again. It is finished.

You also cannot contribute to an RRIF, in case you are wondering. It is an INCOME fund, not a SAVINGS plan.

WHAT IS MY MINIMUM WITHDRAWAL AMOUNT FOR AN RRIF?

Formula: December 31st balance from the previous year multiplied by 1/90 minus your age.

So example:

100,000 from the previous year was your balance

100,000 x (1/90) – 72 = $1039.11

This formula only applies until the age of 71.

At the age of 71, the government decides the withdrawal limits.

WHO GETS MY RRSP / RRIF?

You can name your spouse as the beneficiary and she/he gets the money tax-free that way.

If your spouse is 71, they get it as an RRIF, no ifs ands or buts.

If they are younger than 71, it can be turned into an RRSP or an RRIF.

CAN I TAKE OUT TOO MUCH FROM AN RRIF?

Yes, you can.

All RRIF income is taxable (Remember? An RRSP is just deferred tax savings).

IF you withdraw OVER the minimum of your RRIF, that excess amount, is subject to withholding taxes.

Withdrawal Amount % Federal Tax Withheld
From $0 to $5,000 10% (5% in Quebec)
From $5,001 to $15,000 20% (10% in Quebec)
Greater than $15,000 30% (15% in Quebec)

So let’s say your minimum is $10,000 and you take out $15,000.

That $5000 is subject to withholding taxes.

WHAT IF IT IS MY ONLY PENSION?

If you are like me and do not have a company pension plan, you can withdraw $2000 a year of income from an RRIF tax-free.

YAY!

Otherwise, remember that an RRSP / RRIF is a tax deferred retirement plan, so you will be paying taxes when you take out the money.

If you happen to have a company pension plan AND RRSP  / RRIF, you do not get $2000 of income free.

IS AN RRIF GOOD?

You can choose your investments, income, and how frequently you get paid.

So yeah it sounds pretty good so far.

HOW DO I GET A FORM TO SUBMIT FOR TAXES?

This RRIF then pays out a fixed amount from your RRSP funds.

Your financial institution or bank will issue you a T4RSP which you can use to claim on your taxes as income (obviously, it is income!)

CAN I WITHDRAW FROM MY RRSP EARLIER?

Yes. With a regular, NOT locked-in RRSP account, you can withdraw from your RRSP any time you want at any age.

The Locked-In RRSPs can only be taken out at the age of 55.

The only caveat is you will pay a withholding tax on top of regular income taxes:

Withdrawal Amount % Federal Tax Withheld
From $0 to $5,000 10% (5% in Quebec)
From $5,001 to $15,000 20% (10% in Quebec)
Greater than $15,000 30% (15% in Quebec)

But it doesn’t end there!

On top of this withholding tax, the money you have taken is also considered as income, and you will have to pay ANOTHER tax on that — your actual income taxes if you have other income coming in.

So basically, if you are working a full-time job, and you want to take out money from the RRSP, you can.

You will just pay your regular income taxes on your salary, another set of taxes for the RRSP amounts you are withdrawing which is the withholding tax, AND that RRSP income gets bundled with your salary and becomes your total taxable income, which could bump you up into a higher tax bracket.

So, it really isn’t in your best interest to withdraw early from your RRSP while you are still working.

You can do it, it just isn’t ideal.

You should try and contribute to an RRSP while you are working, and then when you stop taking a salary or working, withdraw from your RRSP then.

This is because when you stop working, you no longer have a salary, and the income you are getting from your RRSP becomes your salary, and is taxed at those withholding amounts above.

I am also reading that you have to be careful that when you retire, you will be earning LESS than when you are working. It happens sometimes that when you retire, you actually make more money than when you are working, and if you throw RRSP / RRIF withdrawals on top of that, you could be paying much more tax than if you took it out while you are working.

Consider your situation before just taking blind advice like waiting until 71 to take out your RRSPs. Take out your money sooner if you need it and if it is beneficial.

For more information, I really like these sites:

• TaxTips.ca – https://www.taxtips.ca
• Retire Happy – https://retirehappy.ca/
• Wealth Simple – https://www.wealthsimple.com/en-ca/investing-101/rrsp
• Wealth Simple RRSP Calculator – https://www.wealthsimple.com/en-ca/tool/rrsp-calculator/

Retired or REALLY into RRSPs/RRIFs? Please comment with more notes below.