Personal Finance

RRSP and withdrawing before age 65

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  • Feb 15th, 2020 12:00 am
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[OP]
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Jul 17, 2008
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RRSP and withdrawing before age 65

I want to put some money in RRSP to lower my current tax year. In the next few years my income will be lower, so I'd like to withdraw each year to top up my first tax bracket.

I know the room is not gained back after withdrawing (like a TFSA). I'll also want to have 0 in RRSP by 65 (and 0 income) so that GIS will not be clawed back come age 65 (OAS + GIS will be about 1400/m + whatever savings I'll have in HISA, but not considered income).

Regarding the automatic tax held when withdarwing an RRSP before age 65, I understood it's 10% to 5k, 20% 5-15k, 30% for more than 15k.

If more tax is withheld using this fixed percentages, will I get a refund come tax time? (articles mention if in higher bracket these fixed percentages might not cover total tax owed, which makes sense).

So if I withdraw 10k, 2k is being held automatically upon withdrawal and I receive 8k, which will be considered income. If this 8k + whatever my income makes me owe 5k in taxes, but I paid let's say 6k (4k in taxes + 2k from RRSP), will I get 1k refund come tax time? Articles don't seem to confirm this, only if you owe more in taxes than being withheld, which again, makes perfect sense.

Also, withdrawing from an RRSP is exactly like TFSA? Just setup a transfer out from the account (or brokerage if I hold stocks in RRSP and sell)?

Thanks
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Messerschmitt wrote: I want to put some money in RRSP to lower my current tax year. In the next few years my income will be lower, so I'd like to withdraw each year to top up my first tax bracket.

I know the room is not gained back after withdrawing (like a TFSA). I'll also want to have 0 in RRSP by 65 (and 0 income) so that GIS will not be clawed back come age 65 (OAS + GIS will be about 1400/m + whatever savings I'll have in HISA, but not considered income).

Regarding the automatic tax held when withdarwing an RRSP before age 65, I understood it's 10% to 5k, 20% 5-15k, 30% for more than 15k.

If more tax is withheld using this fixed percentages, will I get a refund come tax time? (articles mention if in higher bracket these fixed percentages might not cover total tax owed, which makes sense).

So if I withdraw 10k, 2k is being held automatically upon withdrawal and I receive 8k, which will be considered income. If this 8k + whatever my income makes me owe 5k in taxes, but I paid let's say 6k (4k in taxes + 2k from RRSP), will I get 1k refund come tax time? Articles don't seem to confirm this, only if you owe more in taxes than being withheld, which again, makes perfect sense.

Also, withdrawing from an RRSP is exactly like TFSA? Just setup a transfer out from the account (or brokerage if I hold stocks in RRSP and sell)?

Thanks
good point.
I am also thinking what to do. Not that I require anything now as I posted before.
I dont care about Ethics, morals, rules or laws. I will apologies only when I get caught.
I try not to apologies but sometimes do it. not because its right thing but it benefits me.
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Jan 30, 2012
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Messerschmitt wrote: I want to put some money in RRSP to lower my current tax year. In the next few years my income will be lower, so I'd like to withdraw each year to top up my first tax bracket.

I know the room is not gained back after withdrawing (like a TFSA). I'll also want to have 0 in RRSP by 65 (and 0 income) so that GIS will not be clawed back come age 65 (OAS + GIS will be about 1400/m + whatever savings I'll have in HISA, but not considered income).
RRSPs accomplish two main things - you can move income from a high-tax year to a low-tax year, and your money grows tax free during that time.

Is the tax-free growth less important than the OAS/GIS clawback for you?

Yes, RRSP withdrawals count as income (and reduce OAS/GIS), but are you better off working longer and withdrawing after you stop working?

You plan to have zero income when you reach age 65? No pension, interest, capital gains, dividends or rental income? I don't think that is a good plan.
Messerschmitt wrote: So if I withdraw 10k, 2k is being held automatically upon withdrawal and I receive 8k, which will be considered income.
No, 10k is considered income. If you are in the 20% marginal tax bracket, the 2k tax withholding is the amount of tax owing from the withdrawal, so you don't end up paying or owing due to this withdrawal when you file your taxes.
Messerschmitt wrote: Also, withdrawing from an RRSP is exactly like TFSA? Just setup a transfer out from the account (or brokerage if I hold stocks in RRSP and sell)?
Yes.

However, note that many (most?) financial institutions have an RRSP withdrawal fee.
Member
Feb 9, 2018
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Messerschmitt wrote: I want to put some money in RRSP to lower my current tax year. In the next few years my income will be lower, so I'd like to withdraw each year to top up my first tax bracket.

I know the room is not gained back after withdrawing (like a TFSA). I'll also want to have 0 in RRSP by 65 (and 0 income) so that GIS will not be clawed back come age 65 (OAS + GIS will be about 1400/m + whatever savings I'll have in HISA, but not considered income).

Regarding the automatic tax held when withdarwing an RRSP before age 65, I understood it's 10% to 5k, 20% 5-15k, 30% for more than 15k.

If more tax is withheld using this fixed percentages, will I get a refund come tax time? (articles mention if in higher bracket these fixed percentages might not cover total tax owed, which makes sense).

So if I withdraw 10k, 2k is being held automatically upon withdrawal and I receive 8k, which will be considered income. If this 8k + whatever my income makes me owe 5k in taxes, but I paid let's say 6k (4k in taxes + 2k from RRSP), will I get 1k refund come tax time? Articles don't seem to confirm this, only if you owe more in taxes than being withheld, which again, makes perfect sense.

Also, withdrawing from an RRSP is exactly like TFSA? Just setup a transfer out from the account (or brokerage if I hold stocks in RRSP and sell)?

Thanks
Whole 10K will be added to your income and actual tax will be assessed when you file your taxes. If your tax bracket is lower and tax withheld was more, you will get a refund.
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Aug 5, 2006
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Sounds like you should consider converting your RRSP $ into a RRIF. Each year you'll get a minimum withdrawal amount based on the 1/(90-age) formula with no withholding taxes. If you withdraw $10K $2K is withheld immediately and you have to declare the full $10K as income. There are ways of minimizing the withholding taxes, for ex you could have your RRIF $ in 2 banks and withdraw $5K from each per year and have only $1K immediately withheld.
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[OP]
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sunbat wrote: Whole 10K will be added to your income and actual tax will be assessed when you file your taxes. If your tax bracket is lower and tax withheld was more, you will get a refund.
Ok so the RRSP tax withheld at withdrawal (5,10,15% depending on the amount taken out) is basically tax paid at withdrawal rather than wait until tax time and pay extra tax on the extra "income" I made from the RRSP withdrawal correct? If for example my income was actually 0 and withdrew 10k, the 2k tax withheld would be all given back to me at tax time (since 10k is under the basic personal tax exemption, so income tax for the year should be 0 for 10k income for the year)
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Feb 9, 2018
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Messerschmitt wrote: Ok so the RRSP tax withheld at withdrawal (5,10,15% depending on the amount taken out) is basically tax paid at withdrawal rather than wait until tax time and pay extra tax on the extra "income" I made from the RRSP withdrawal correct? If for example my income was actually 0 and withdrew 10k, the 2k tax withheld would be all given back to me at tax time (since 10k is under the basic personal tax exemption, so income tax for the year should be 0 for 10k income for the year)
Yes, that is correct. You will get a T4RSP from the bank when you withdraw from RSP. You will need to use that when you file taxes. This has the info about withdrawal and taxes withheld.
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Most FIs will charge a fee to withdraw funds from an RRSP, normally around $50 per transaction. Converting your RRSP into an RRIF will avoid these fees since most FIs do not charge for RRIF withdrawals...that's what I did.

The only drawback with an RRIF is that you're forced to withdraw a minimum amount each year, whether you want to or not. As long as you're young, the amounts are not large (or if your spouse is young since you have the option of using your spouse's age in the calculation). Formula is 1 / 90 - age
[OP]
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Sauerkraut wrote: Most FIs will charge a fee to withdraw funds from an RRSP, normally around $50 per transaction. Converting your RRSP into an RRIF will avoid these fees since most FIs do not charge for RRIF withdrawals...that's what I did.

The only drawback with an RRIF is that you're forced to withdraw a minimum amount each year, whether you want to or not. As long as you're young, the amounts are not large (or if your spouse is young since you have the option of using your spouse's age in the calculation). Formula is 1 / 90 - age
I don't think brokerages allow RRIF? You can convert to RRIF at any age?
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Messerschmitt wrote: I don't think brokerages allow RRIF? You can convert to RRIF at any age?
Sure they do...at least the good ones. I can't speak for any of the marginal players.

Yes, any age.
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Oct 23, 2017
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Messerschmitt wrote: I'll also want to have 0 in RRSP by 65 (and 0 income) so that GIS will not be clawed back come age 65 (OAS + GIS will be about 1400/m + whatever savings I'll have in HISA, but not considered income).
Thanks
So you are planning to retire on $1,400 a month if I understand correctly? Will you also have a big stash of cash to draw down? I'm curious how you would live on that, perhaps you are a frugalist?

And of course the only difference between withholding tax and tax paid at the end of the year is the timing - you will settle up with the CRA when you file at the end of the tax year. If you have a surplus at that time, the CRA won't pay you any interest on it when they refund it. But if you consistently owe a lot of tax at the end of the year, they will force you to pay your income tax in installments during the year.
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Messerschmitt wrote:

Also, withdrawing from an RRSP is exactly like TFSA? Just setup a transfer out from the account (or brokerage if I hold stocks in RRSP and sell)?

Thanks
I am confused. How withdrawing from an RRSP is exactly like TFSA? RRSP withdrawal are with withholding tax. TFSA withdrawals are without any right?

You can put that money deposited after RRSP withdrawal in TFSA but make sure you are having sufficient contribution limit.
I dont care about Ethics, morals, rules or laws. I will apologies only when I get caught.
I try not to apologies but sometimes do it. not because its right thing but it benefits me.
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Dealmaker1945 wrote: So you are planning to retire on $1,400 a month if I understand correctly? Will you also have a big stash of cash to draw down? I'm curious how you would live on that, perhaps you are a frugalist?

And of course the only difference between withholding tax and tax paid at the end of the year is the timing - you will settle up with the CRA when you file at the end of the tax year. If you have a surplus at that time, the CRA won't pay you any interest on it when they refund it. But if you consistently owe a lot of tax at the end of the year, they will force you to pay your income tax in installments during the year.
Ok.... so let's just base this on single person, on 2020 numbers

CPP are yours, regardless of income.
OAS is only yours if you claim less than $128k of income per year.

GIS only kicks in if you have less than $18,600/year

So assuming OP is quoting OAS+GIS max is 1400/month (actually it's $1500 this year). He is getting no CPP at all. So his income that allows him to amass RRSP isn't from employment, that means he amass sizable amount of cash/asset outside retirement portfolios.

Now for OP to keep claiming $1500/month, he must have 0 income per year. No RRSP withdrawals at all.

Depends on the size of RRSP portfolio, he need to draw that down and pay taxes on it before hitting 65. And if that portfolio turns into RRIF in 71, he will lose that flexibility and potentially loses GIS.

So working backwards, if OP has $500K RRSP portfolio and his is 55 and retired. He can basically draw $50K/year to be at the lowest tax rate to empty it. Then use whatever and throw $6K back into TFSA to keep growing there. So in 10 years, OP would have got $500K out and $60K back into a protected portfolio.
Last edited by Xtrema on Feb 12th, 2020 9:35 pm, edited 1 time in total.
[OP]
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callernamet wrote:
I am confused. How withdrawing from an RRSP is exactly like TFSA? RRSP withdrawal are with withholding tax. TFSA withdrawals are without any right?

You can put that money deposited after RRSP withdrawal in TFSA but make sure you are having sufficient contribution limit.
I meant I can just transfer out from the account like a TFSA or HISA (no need to do extra legwork and paperwork via bank/brokerage to withdraw. I didn't meant to refer to contribution limit, how tax implication works
Xtrema wrote: Ok.... so let's just base this on single person, on 2020 numbers

CPP are yours, regardless of income.
OAS is only yours if you claim less than $128k of income per year.

GIS only kicks in if you have less than $18,600/year

So assuming OP is quoting OAS+GIS max is 1400/month (actually it's $1500 this year). He is getting no CPP at all. So his income that allows him to amass RRSP isn't from employment, that means he amass sizable amount of cash/asset outside retirement portfolios.

Now for OP to keep claiming $1500/month, he must have 0 income per year. No RRSP withdrawals at all.

Depends on the size of RRSP portfolio, he need to draw that down and pay taxes on it before hitting 65. And if that porfolio turns into RRIF in 71, he will lose that flexibility.
He gets it!

I won't have 0 CPP but I used it for ease of simplicity. Planning to retire before I'm eligible for OAS/GIS, enjoy live, do traveling before I get too old, and that's the time to draw down my RRSP to 0 (while keeping my non taxable nest egg to use after 65).
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Messerschmitt wrote: He gets it!

I won't have 0 CPP but I used it for ease of simplicity. Planning to retire before I'm eligible for OAS/GIS, enjoy live, do traveling before I get too old, and that's the time to draw down my RRSP to 0 (while keeping my non taxable nest egg to use after 65).
Um, I still don't. If you do have CPP, doesn't that count as income that reduces your GIS?

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