Personal Finance

Retiring early withdrawing rrsp

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  • Dec 15th, 2018 8:27 pm
[OP]
Jr. Member
Jan 24, 2014
148 posts
23 upvotes

Retiring early withdrawing rrsp

Hi everyone. If I am retiring early so I won't be working next year and I am not 60 yet. What are the penalties I'll get.for withdrawing my rrsp? Will it make a difference since I will be in a low tax bracket? Thanks!
20 replies
Deal Fanatic
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Feb 19, 2010
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spankypants wrote:
Dec 13th, 2018 1:25 am
Hi everyone. If I am retiring early so I won't be working next year and I am not 60 yet. What are the penalties I'll get.for withdrawing my rrsp? Will it make a difference since I will be in a low tax bracket? Thanks!
Why would there be any penalties? :eek:

My wife and I also early-retired and have both been grinding down our LIRA and RSP accounts and targeting the high end of the lowest tax bracket (~$46K per year) for our annual income.

You will pay withholding taxes (prepayment of your tax liability) when you de-register but you'll likely get some of that back if you manage your taxable income accordingly.
Member
User avatar
May 31, 2018
210 posts
274 upvotes
Saskatchewan
No penalties unless you're invested in something like Golden Opportunities in SK and want to withdraw early...they offered significant tax benefits but you had to stay in for at least 8 years if I remember right.

Like Conquistador we skated the edge of the bottom and next bracket as we drained our RRSP's over the last ~10 years, and aside from the withholding tax there was also a $50 fee per redemption (we had most of them with TD). Our accountant did all of the math for us to ensure we didn't go over the bracket line as we had other variable income in those years, so hiring someone might be an option if you're unsure how much you can "safely" withdraw each year.
Member
Jun 19, 2007
492 posts
247 upvotes
Halifax
Conquistador wrote:
Dec 13th, 2018 1:58 am
Why would there be any penalties? :eek:

My wife and I also early-retired and have both been grinding down our LIRA and RSP accounts and targeting the high end of the lowest tax bracket (~$46K per year) for our annual income.

You will pay withholding taxes (prepayment of your tax liability) when you de-register but you'll likely get some of that back if you manage your taxable income accordingly.
Out of curiosity how are you pulling money out of your LIRA? I currently have one that was a pension at an old company I got laid off from. I don't need the money per se, but would much rather have access to it as I find it an affront for them to restrict access to my own money, would also be good to get it out from under the registered umbrella while avoiding tax since my (employment) income will likely be around 0 next couple years.

As to the OP, no penalties, here it's just treated like income so you pay regular income tax, I've done it twice before, no issue at all. So the only thing (ideally planned out well in advance) is to avoid putting away RRSP money when you're making less, and avoid withdrawing it it you have a lot of other income. So many people I meet simply don't understand what the actual benefit of an RRSP is. Basically, it's the time value of whatever refund you get until you start pulling money out, + the difference in marginal tax rate between when you put it away and pull it out.

People like to call the RRSP a panacea to financial prosperity, However the only way to really get much benefit is to have rotating times of huge income, and periods of next to none. For the vast majority of people with steady incomes who spend most of what they make and expect to have similar expenses after retirement, the benefit is much more muted. Great, you save 25% of taxes on that contribution. Well you just have to turn around and pay that exact same amount out again when you pull that money out - unless you're doing something to ensure your income is sub 10k and the remainder comes from savings. If you aren't' smart about it and put money away when you had a small income, after struck some prosperity, and are planning on some gold plated retirement where you pull the RRSP, you could actually end up being worse off. And this speaks nothing to what marginal tax rates are in the future.
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May 16, 2017
702 posts
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seadog83 wrote:
Dec 13th, 2018 11:24 am
For the vast majority of people with steady incomes who spend most of what they make and expect to have similar expenses after retirement, the benefit is much more muted.
I would venture that a huge proportion of people can not and do not have the same income after retirement and therefore must plan to have similarly reduced expenditures after retirement. That is why they sock away funds in an RRSP to take out when their income is lower and thus taxed at a lower marginal rate. If that isn't the plan, then shift to emphasize a TFSA.
Newbie
Jan 24, 2011
11 posts
3 upvotes
Edmonton
I'm confused about the witholding tax.. cause from 0-5000 you're taxed 10% and then up to 10K its 20% and then 30% thereafter so i'm confused as to when they penalize that. Is it only at a certain income bracket?
Jr. Member
Dec 25, 2015
119 posts
62 upvotes
Brighton, ON
They withhold 10% for 0-5000, etc. When you do your taxes you are able to show the amount of tax already paid (withheld), which gets applied on your tax return (line 437).
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Feb 19, 2010
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780300605 wrote:
Dec 13th, 2018 12:14 pm
I'm confused about the witholding tax.. cause from 0-5000 you're taxed 10% and then up to 10K its 20% and then 30% thereafter so i'm confused as to when they penalize that. Is it only at a certain income bracket?
It's still not a penalty. It's the same thing as having tax taken off your pay cheque at work and gets applied to your total tax liability when you file your income taxes for the year.
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seadog83 wrote:
Dec 13th, 2018 11:24 am
Out of curiosity how are you pulling money out of your LIRA? I currently have one that was a pension at an old company I got laid off from. I don't need the money per se, but would much rather have access to it as I find it an affront for them to restrict access to my own money, would also be good to get it out from under the registered umbrella while avoiding tax since my (employment) income will likely be around 0 next couple years.
To some extent I think it depends on legislation within your Province and the source of funds that went into the LIRA. Notwithstanding the nuances across provinces, in Alberta there are different scenarios for which you can access the funds in your LIRA well before what would otherwise be the prescribed age that you could do it.

Here's a pretty good link that may be of assistance.
https://www.taxtips.ca/pensions/rpp/unlockingrpp.htm
Deal Fanatic
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Dec 27, 2009
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Ottawa, ON
780300605 wrote:
Dec 13th, 2018 12:14 pm
I'm confused about the witholding tax.. cause from 0-5000 you're taxed 10% and then up to 10K its 20% and then 30% thereafter so i'm confused as to when they penalize that. Is it only at a certain income bracket?
It isn't really "penalized". It can also be avoided by making sure you just withdraw $5K at a time. I know I've done that before (took about $15K total when unemployed at one point, but in separate withdrawals).
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Chickinvic wrote:
Dec 13th, 2018 1:35 pm
It isn't really "penalized". It can also be avoided by making sure you just withdraw $5K at a time. I know I've done that before (took about $15K total when unemployed at one point, but in separate withdrawals).
Depends to some extent on the financial institution. Some will consider cumulative withdrawals for the year when withholding taxes.
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Dec 27, 2009
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Conquistador wrote:
Dec 13th, 2018 2:05 pm
Depends to some extent on the financial institution. Some will consider cumulative withdrawals for the year when withholding taxes.
That sucks. I guess I've been lucky and haven't had them do that.
Newbie
Jan 24, 2011
11 posts
3 upvotes
Edmonton
Amount Withdrawn CRA Withholding Tax Deducted
Up to $5,000 10% Withholding Tax
$5,000 to $15,000 20% Withholding Tax
Amounts over $15,000 30% Withholding Tax

HMM
Deal Fanatic
Feb 1, 2006
9530 posts
678 upvotes
Muskoka
To all of you here withdrawing RRSP's, is there a reason you are not using RRIF's to do so? There is no age requirement to convert it, there would be no withholding fees, and no per-withdrawal fee from the bank.

We mostly retired at 41, and haven't touched the RRSP's yet (it would drastically reduce our Child Tax Benefit), but when we eventually do, we will use RRIF's.
Deal Fanatic
Feb 1, 2006
9530 posts
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Muskoka
seadog83 wrote:
Dec 13th, 2018 11:24 am

People like to call the RRSP a panacea to financial prosperity, However the only way to really get much benefit is to have rotating times of huge income, and periods of next to none. For the vast majority of people with steady incomes who spend most of what they make and expect to have similar expenses after retirement, the benefit is much more muted. Great, you save 25% of taxes on that contribution. Well you just have to turn around and pay that exact same amount out again when you pull that money out - unless you're doing something to ensure your income is sub 10k and the remainder comes from savings. If you aren't' smart about it and put money away when you had a small income, after struck some prosperity, and are planning on some gold plated retirement where you pull the RRSP, you could actually end up being worse off. And this speaks nothing to what marginal tax rates are in the future.
RRSP's are a great tool for many people. Higher income earners are getting more like a 40% refund, and hopefully paying 20% or so in taxes in retirement. Lower income earners with children and get a big boost to child tax benefits by using RRSP's.

You do need to do some proper tax planning to make it work for you, of course. You could do something clever like take $12k each tax free, then top up with TFSA or non-registered withdrawals.

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