There are many reasons for pulling money from
your RRSP, buying a home, going back to school, retirement, emergencies, etc. In previous videos, I’ve outlined how you
can do that to purchase your first home or go back to school. Today, I’ll discuss other reasons why you
might pull money out of your RRSP and how that works. I’m Susan Daley and this is Your Money,
Your Choices. The first reason why you might pull money
out of your RRSP is if you’ve made an over contribution. You’re only allowed to put a certain amount
of money into the RRSP based on your personal contribution room according to the CRA. You might be in the position where you’ve
put in more than you’re allowed. I would suggest avoiding this as much as possible
because if you put more than $2,000 extra into your RRSP, you’re charged a steep penalty
by the CRA, 1% per month on the excess contribution. But hey, mistakes happen, so it’s not the
end of the world if you’re in this situation. If it does happen, you can submit a request
to your financial institution to withdraw the excess contribution without having to
pay a withholding tax by completing CRA form T3012A. (I’ll talk about withholding taxes in a minute), There’s a link to the CRA form to withdrawal the excess in the description
below. You’ll also want to submit a Request for
Taxpayer Relief to Cancel or Waive Penalties or Interest form and explain why you shouldn’t
have to pay the 1% penalty – that it was a reasonable mistake, and you have withdrawn
(or are in the process of withdrawing) the excess contribution. By doing these two things, you’ll hopefully
remove the amount you over-contributed to your RRSP with little penalties or taxes owed. Alternatively you can simply pay the penalty
and move on. A second reason why you might pull from your
RRSP is to use that money to pay for emergencies This is rarely a good idea, because you’ll
be taxed on the income you pull from the RRSP. Depending on how much you pull from the account
you’ll initially be hit with a withholding tax. This withholding tax depends on the amount
you withdraw. Withdrawals up to $5,000 incur a withholding
tax of 10%. Withdrawals between $5,000 and $15,000 incur
a withholding tax of 20%, and withdrawals over $15,000 incur withholding taxes of 30%. For example, let’s say that you want to
buy a boat for $20,000, and want to use funds from your RRSP. If you withdrew $20,000 from your RRSP, you’d
only get $14,000 in your pocket. $6,000 automatically goes to the CRA for taxes. If you needed $20,000 in your pocket, you’d
have to withdraw about $28,570. This is the automatic withholding tax you
owe, but isn’t necessarily the tax you owe on the funds. If you are in a tax bracket that’s higher
than 30%, you’ll owe even more tax at tax time, if you’re in a lower tax bracket,
you might get some of that tax back. This is because RRSP withdrawals are taxed
as regular income, and are therefore taxed at your marginal tax rate. For example, someone earning $30,000 per year
in Ontario is currently in the lowest tax bracket at 20.05%. A $20,000 withdrawal from the RRSP will bump
them into a higher tax bracket, but it’s still less than 30%, what they’ve already
paid in taxes. They’ll actually get $1,444 back at tax
time. Someone earning $80,000 has a tax bracket
above 30% tax bracket, and withdrawing $20,000 would bump them into an even higher tax bracket,
and they would owe additional tax of $1,622 on the withdrawal at tax time. $30,000 Earner
$80,000 Earner RRSP Withdrawal
$20,000 $20,000
Total Income $50,000
$100,000 Tax Owing on Withdrawal Based on Total Income
$4,556 $7,622
Tax Paid Through Withholding Tax $6,000
$6,000 Tax Owing at Tax Time
-$1,444 $1,622 This is why pulling from your RRSP for spending
is a terrible idea. Any spending should be within your ability
to pay for it through your regular income, or ongoing savings that have been set aside
for that spending. You also shouldn’t be tapping into your
RRSP for emergencies either. For emergencies, an emergency fund should
be set up, or at least have access to a Line of Credit so that you don’t have to pull
valuable retirement savings to fund emergencies and get penalized. You don’t get your contribution room back
when you withdraw, meaning that unlike the TFSA, any withdrawals you make from your RRSP
can’t go back in at a later date. So pulling from your RRSP, especially if you’re
maxing it out (or plan on maxing it out in the future) reduces the amount of retirement
savings you’re able to shelter from taxes. Similar to the previous case, pulling money
from your RRSP for retirement income is taxed at your marginal tax rate. However, since many people are in a lower
tax bracket in retirement than they were when they contributed to the RRSP as their income
needs are less: they don’t need to save for retirement, their mortgage is paid off,
children are out of the house, there are tax benefits for senior retirees, the tax paid
on withdrawal is less than the tax benefit gained on contribution. For more information on this, see my video
“Rethinking RRSP’s”. If you’re pulling from the RRSP during retirement,
a withholding tax still applies. What the vast majority of people do is convert
their RRSP to a RRIF (registered retirement income fund) either at retirement, or when
their required to wind-up their RRSP’s at age 71. The RRIF can eliminate some or all of the
withholding tax on withdrawals. In summary, withdrawals from RRSP’s are
taxed at your marginal tax rate, and incur withholding taxes between 10 and 30%. If you overcontribute to your RRSP and make
a withdrawal to fix it and remove the excess, you can avoid the withholding tax, and can
potentially avoid penalties if you ask CRA nicely. These taxes on withdrawals aren’t necessarily
a bad thing though, if it keeps you from raiding your RRSP for expenses not related to retirement! I’m Susan Daley and this has been Your Money,
Your Choices. I put videos out every two weeks, so be sure to subscribe!