Question regarding RRSP withdrawal penalty

[Sonbuster]

i'm not sure how it works, but i heard that if you withdraw early you get penalized in that you have to pay the marginal rate of tax on your RRSP.

my question is: if i were unemployed in 2008 and my basic allowance is 9600, can i withdraw 9600 from my RRSP and not have to pay tax on it? BTW, that's what basic allowance means right? is the first portion of your income up to that limit exempt from taxes?

thanks. just needed some clarification.

[Wonderdollar]

i'm not sure how it works, but i heard that if you withdraw early you get penalized in that you have to pay the marginal rate of tax on your RRSP.

my question is: if i were unemployed in 2008 and my basic allowance is 9600, can i withdraw 9600 from my RRSP and not have to pay tax on it? BTW, that's what basic allowance means right? is the first portion of your income up to that limit exempt from taxes?

thanks. just needed some clarification.

The Bank or financial institution supposed to withheld tax on your RRSP withdrawal as per the laws. However, the bank would give you T4RSP receipt which will show the amount of withdrawal (income) as well as the tax deducted. Once you file your tax return for year 2008 in April 2009 and if your income is nil from all other sources but for this RRSP income, not only you would get the total tax deducted back but may be some other refundable tax credits as well.

[grant]

there is no "penalty" it's simply considered taxable income.

Yes if you are unemployed and your only income for the year is $8000 or whatever withdrawn from your RRSP, then your income for the year will fall under your personal exemption and you will pay no income tax.

Withdrawing from your rrsp when you are unemployed is a perfectly reasonable use for it.

[ghostryder]

i'm not sure how it works, but i heard that if you withdraw early you get penalized in that you have to pay the marginal rate of tax on your RRSP.

There is no penalty for withdrawing money from your RRSP. That money has never been taxed so when you withdraw you have to pay the tax on it then. That's not a penalty.

You will have to pay a certain amount of withholding tax when you make the withdrawal. Whether or not you will get it back will depend on the outcome when you file your next tax return.

my question is: if i were unemployed in 2008 and my basic allowance is 9600, can i withdraw 9600 from my RRSP and not have to pay tax on it? BTW, that's what basic allowance means right? is the first portion of your income up to that limit exempt from taxes?

Basically yes. If the only income you have for the year is the $9600 you withdrew from your RRSP then you will pay no tax. Whatever was withheld when you made the withdrawal will be refunded.

Keep in mind though that you will never get that contribution room back.

[dux]

i'm not sure how it works, but i heard that if you withdraw early you get penalized in that you have to pay the marginal rate of tax on your RRSP.

my question is: if i were unemployed in 2008 and my basic allowance is 9600, can i withdraw 9600 from my RRSP and not have to pay tax on it? BTW, that's what basic allowance means right? is the first portion of your income up to that limit exempt from taxes?

thanks. just needed some clarification.

The only catch is, they won't let do partial withdraws. So if you have 20k invested in RRSP they won't let you just take out 9600.

[Wonderdollar]

The only catch is, they won't let do partial withdraws. So if you have 20k invested in RRSP they won't let you just take out 9600.

Incorrect.

You are at liberty to withdraw whatever money you wish to withdraw from your RRSP and the bank would not have objection to it.

It's your money and it's your sweet will.

[lasallejai]

If you are going to withdraw $9,600 this year, then make sure you do it by two transactions, because the withhlding tax for amounts between $5,001 and $15,000 is 20%, whereas if you do one for $5,000 and second one for $4,600, then the withholding tax is only 10% since the withholding tax from $1to $5,000 is 10% only. It is true that you will eventually get the withheld tax amount back eventually, but then why not keep the extra 10% in your own pocket now than getting them back next year??? Just my two cents of the day.

[Thalo]

Be aware that most banks charge a fee per withdrawal too. At TD we used to waive this fee most of the time, but I believe the systems have made it unwaivable now, or at least harder to waive. $50 plus tax.

[Just Confused]

Be aware that most banks charge a fee per withdrawal too. At TD we used to waive this fee most of the time, but I believe the systems have made it unwaivable now, or at least harder to waive. $50 plus tax.

I had that exact circumstance about 10 years ago.... unemployed....needed cash. My fees weren't waived at CIBC. IIRC they were $150 a pop. I, too, tried to stay under the $5K for 10% witholding tax but had to do it twice. In the end it wasn't a very pleasant experience.

In fact, that experience coloured my whole opinion of RRSP's. Now I prefer defer tax with other vehicles. With an RRSP I have an investment where I received a tax break on low margin contributions and I can't get the stuff out without paying a higher marginal rate during retirement.

[bemui]

If you are going to withdraw $9,600 this year, then make sure you do it by two transactions, because the withhlding tax for amounts between $5,001 and $15,000 is 20%, whereas if you do one for $5,000 and second one for $4,600, then the withholding tax is only 10% since the withholding tax from $1to $5,000 is 10% only. It is true that you will eventually get the withheld tax amount back eventually, but then why not keep the extra 10% in your own pocket now than getting them back next year??? Just my two cents of the day.

If you don't have any income in a year, you definitely want to withdraw from your RRSP, up to 9,600. That's the benefit of an RRSP - withdraw when you have no income and pay no taxes.

Best time is the withdraw in Dec and file your return right away in the following year to get it back.

[ghostryder]

With an RRSP I have an investment where I received a tax break on low margin contributions and I can't get the stuff out without paying a higher marginal rate during retirement.

Assuming you retire to a higher bracket than you were in during your work years.

[john1953]

Assuming you retire to a higher bracket than you were in during your work years.

I am behind in paying income tax .CAn I use my RRSP to pay without being heavily taxed once again.thank you

[myapple]

I am behind in paying income tax .CAn I use my RRSP to pay without being heavily taxed once again.thank you

If funds are in your RRSP acct, it means those funds have not been taxed yet, so it's not really 'being heavily taxed once again', it is being taxed the first time.