RRSP Withdrawal and Taxes

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Sep 3rd, 2019 11:38 am

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Aug 31st, 2019 11:26 am

Radudu [OP]: Member; Jun 15, 2010; 247 posts; 43 upvotes; RedFlagDeals

Aug 31st, 2019 11:26 am

RRSP Withdrawal and Taxes

https://www.canada.ca/en/revenue-agency ... awals.html

Hi All,

Dumb question. Since I'm not a Finance guy, I just wanted to check on RRSP Withdrawal and Taxes for my parents when they retire at 65. They have a RRSP account held at Questrade, where they own some stable div paying stocks. On their birthday when they turn 65, are they eligible to withdraw from their account or is there some sort of process that they need to go through to withdraw their funds?

Also (Taxes)

Based on the above link, tax rates are

10% on amounts up to $5,000
20% on amounts over $5,000 up to including $15,000
30% on amounts over $15,000

If my parents are withdrawing $500 per month from their RRSP account, will they be charged 10% so $50 per month in taxes or $600 in taxes for the year? Or is calculated using the annual withdrawal amount so (12months * $500 = $6000), so 20% tax rates = $1200 in taxes for the year?

Thanks all

9 replies

Aug 31st, 2019 12:08 pm

renoldman: Deal Fanatic; Sep 23, 2009; 5088 posts; 2270 upvotes

Aug 31st, 2019 12:08 pm

You can withdraw the funds any time you want.

Just remember that when you withdraw, it's added to you (or your parents) taxable income.

From working at a bank, it really should be 10% withheld on the first $5,000 withdrawn for the year and 20% up to $15,000 and 30% after that. However, most of the time they don't track this unless you are obviously layering the transactions. I doubt this has really changed unless the CRA has imposed fines on the financial institutions for not following this.... a lot of people have withdrawn and then "forgotten" about additional taxes.

The tax withheld is not all that is owed, you (or your parents) will have to complete taxes at the end of the year and pay the difference (or get a refund).

When you put into the RRSP, the amount was taken off your taxable income. Now when withdrawing, the amount is added to your taxable income.

These are the basic ideas, I have assumed that this is a basic Self-Directed RRSP and not some locked-in one which can have different rules.

+5

Aug 31st, 2019 12:17 pm

DaveTheDude: Deal Addict; Mar 3, 2018; 2167 posts; 2180 upvotes; GTA

Aug 31st, 2019 12:17 pm

You may want to convert the RRSP into a RRIF when the parent with the plan turns 65. Withdrawals would then qualify for a pension deduction of $2,000 per year for each parent.

Also the RRIF withdrawal income can be split for tax purposes between spouses. Helps if one parent is in a lower tax bracket.

+3

Aug 31st, 2019 12:23 pm

hockeyfan1990: Sr. Member; Apr 18, 2017; 873 posts; 695 upvotes

Aug 31st, 2019 12:23 pm

They can convert the rrsp to a rrif and the income received will be pensionable income. I would go that root as long as they aren’t getting any other pension yet like CPP etc. This would apply if they’re age 65 and up which they will be.

+1

Aug 31st, 2019 5:10 pm

scoper: Deal Fanatic; Aug 5, 2006; 6356 posts; 3205 upvotes; Global Village

Aug 31st, 2019 5:10 pm

At the very least each of your parents should transfer $12,000 from their RRSP into a RRIF when they turn 65. They will then each be able to withdraw $2K per year for the next 6 years tax free with the Pension Income Tax Credit.

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+3

Aug 31st, 2019 7:50 pm

Radudu [OP]: Member; Jun 15, 2010; 247 posts; 43 upvotes; RedFlagDeals

Aug 31st, 2019 7:50 pm

Thank you all for your responses. Thumbs uped all

I need to do more research on this, but your responses gave me a good start. Have a great long weekend!

Sep 1st, 2019 1:35 pm

Thalo: Deal Fanatic; Jul 1, 2007; 8502 posts; 1631 upvotes

Sep 1st, 2019 1:35 pm

Maybe your parents should see a financial planner? If they don't know, and you don't know?

Money Smarts Blog wrote: ↑I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.

+1

Sep 1st, 2019 3:28 pm

bipster: Jr. Member; Sep 10, 2017; 174 posts; 165 upvotes

Sep 1st, 2019 3:28 pm

Be very careful about the 10-30% tax rates you saw on the link. These are only the withholding taxes, not the actual taxes that are owed.

Withdrawals from RRSP's count as taxable income, so are treated the same as income from a job. The actual tax rate you owe depends on your yearly income. The withholding taxes are just the portion held on for taxes, just like taxes are taken off on your paycheck. When you file your tax return, you have to pay taxes if your actual taxes are more than what was withheld, and you get a refund if you paid more taxes when your actual taxes owed for the year.

If there was 10% withheld for the withdrawal but your actual marginal (or average marginal if bumping up a bracket) tax rate is higher, you will have to pay the remaining at tax time.
If your actual tax rate is lower, you will get it back the difference with your tax return.

The goal will likely be to maximize your tax efficiency over time, so that your parents pay the least taxes over the course of their retirement. Retirement planning also has to consider CPP payments (which are taxable), OAS (also taxable), GIS (not-taxable, but amounts are based on your income), and so on. I would recommend talking to a retirement financial planner, as you want to try to balance RRSP withdrawals, TFSA withdrawals (and possibly contributions), when to take CPP, OAS, and if you could qualify for GIS so that you can maximize retirement tax efficiency.

If you'd like to send me a private message with some numbers with your parents situation, I could run some basic numbers for you.

+2

Sep 2nd, 2019 6:42 pm

Radudu [OP]: Member; Jun 15, 2010; 247 posts; 43 upvotes; RedFlagDeals

Sep 2nd, 2019 6:42 pm

Thalo wrote: ↑ Maybe your parents should see a financial planner? If they don't know, and you don't know?

Yup, we will probably be doing that as well. Just thought I would post on here to get a rough idea.

bipster wrote: ↑ Be very careful about the 10-30% tax rates you saw on the link. These are only the withholding taxes, not the actual taxes that are owed.

Withdrawals from RRSP's count as taxable income, so are treated the same as income from a job. The actual tax rate you owe depends on your yearly income. The withholding taxes are just the portion held on for taxes, just like taxes are taken off on your paycheck. When you file your tax return, you have to pay taxes if your actual taxes are more than what was withheld, and you get a refund if you paid more taxes when your actual taxes owed for the year.

If there was 10% withheld for the withdrawal but your actual marginal (or average marginal if bumping up a bracket) tax rate is higher, you will have to pay the remaining at tax time.
If your actual tax rate is lower, you will get it back the difference with your tax return.

The goal will likely be to maximize your tax efficiency over time, so that your parents pay the least taxes over the course of their retirement. Retirement planning also has to consider CPP payments (which are taxable), OAS (also taxable), GIS (not-taxable, but amounts are based on your income), and so on. I would recommend talking to a retirement financial planner, as you want to try to balance RRSP withdrawals, TFSA withdrawals (and possibly contributions), when to take CPP, OAS, and if you could qualify for GIS so that you can maximize retirement tax efficiency.

If you'd like to send me a private message with some numbers with your parents situation, I could run some basic numbers for you.

Thanks for the heads up! We are planning to see a financial planner in the near future as well to definitely discuss these points. I appreciate the help, but I don't know the exact figures now since I live away from my parents but I just remembered they do hold some investments in their RRSP accounts.

Sep 3rd, 2019 11:38 am

callernamet: Deal Addict; Mar 10, 2018; 3796 posts; 830 upvotes; centre of universe

Sep 3rd, 2019 11:38 am

bipster wrote: ↑ Be very careful about the 10-30% tax rates you saw on the link. These are only the withholding taxes, not the actual taxes that are owed.

Withdrawals from RRSP's count as taxable income, so are treated the same as income from a job. The actual tax rate you owe depends on your yearly income. The withholding taxes are just the portion held on for taxes, just like taxes are taken off on your paycheck. When you file your tax return, you have to pay taxes if your actual taxes are more than what was withheld, and you get a refund if you paid more taxes when your actual taxes owed for the year.

If there was 10% withheld for the withdrawal but your actual marginal (or average marginal if bumping up a bracket) tax rate is higher, you will have to pay the remaining at tax time.
If your actual tax rate is lower, you will get it back the difference with your tax return.

The goal will likely be to maximize your tax efficiency over time, so that your parents pay the least taxes over the course of their retirement. Retirement planning also has to consider CPP payments (which are taxable), OAS (also taxable), GIS (not-taxable, but amounts are based on your income), and so on. I would recommend talking to a retirement financial planner, as you want to try to balance RRSP withdrawals, TFSA withdrawals (and possibly contributions), when to take CPP, OAS, and if you could qualify for GIS so that you can maximize retirement tax efficiency.

If you'd like to send me a private message with some numbers with your parents situation, I could run some basic numbers for you.

Yeah. Good post. People just assume whatever deducted is the only taxes they have to pay.

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