Minimizing the RRSP Withholding Tax on Withdrawals
You’ll recall that withdrawals from your RRSP are normally included as income in the year that you make the withdrawals (save for a few exceptions). If you happen to be in a low income year and have the need to make a withdrawal from your RRSP, then it might make sense to space out your withdrawals such that you minimize the withholding tax that your RRSP issuer will remit to the Government on your behalf…
For example we know that your RRSP issuer will withhold the following percentages if you ask to make a withdrawal from your RRSP:
Withdrawal of up to $5,000 = 10% Withheld
Withdrawal of $5,001 – $15,000 = 20% Withheld
Withdrawal of $15,001 and above = 30% Withheld
So let’s say you are in a year where you have NO income from work and you decide that in order to pay your bills you will have to withdraw approximately $17,500 from your RRSP. In Ontario, someone with a taxable income of $17,500 would pay about $1,869 in income tax for the year (according to the trusty online 2007 tax calculators at Ernst & Young’s website).
Well, according to the chart up above, if you made a withdrawal of $17,500 from an RRSP account in one transaction – your RRSP issuer is obligated to withhold 30% of that $17,500 – or in other words: $5,250! Therefore, you would have to wait until you filed your taxes for 2007 before you would receive a tax refund of $3,381 (which is equal to $5,250 taxes paid minus $1,869 taxes owing). Would you loan any money to the government interest-free if you could avoid it? Well, most people wouldn’t – and here is one way to go about it:
You could space out your withdrawals so that instead of having one lump sum withdrawal of $17,500, you could structure it as four separate withdrawals of $4,375. In this case, each withdrawal would only be subject to a withholding amount of 10%, or $437.50 per withdrawal. $437.50 multiplied by four withdrawals equals $1,750. So in this case, you would actually be borrowing $119 from the Government interest-free until you filed your taxes ($1,869 taxes owing for the year minus $1,750 paid in the form of withholding tax).
One thing to note is that if you ask your RRSP issuer for $5,000 NET (meaning that is how much money will be transferred to your bank account AFTER deducting withholding taxes) then that puts you in the $5,001 – $15,000 withdrawal range, since in order to provide you with $5,000 net, they will need to de-register $6,000 GROSS (20% of $6,000 = $1,200 withheld).
Additionally, if you make a withdrawal from your RRSP in a higher income year, and the withdrawal is for under $5,000 – your RRSP issuer may not withhold ENOUGH tax and you will have a higher tax bill come tax time than you might have otherwise thought.
For example, let us say you are in the top tax bracket in Ontario (46.41%) and for whatever reason, you decide to make a withdrawal of $5,000 GROSS from your RRSP account. Your RRSP issuer will withhold 10%, or $500, from the gross amount to leave you with $4,500. Therefore you have paid $500 in income tax in advance for this withdrawal. HOWEVER, as a top-tax bracket investor, you will actually owe a total of $2,320.50 in income tax on this withdrawal. Since you have only paid $500 “in advance”, you will be on the hook for an additional $1,820.50 come tax time!
And finally, I know that some RRSP issuers will not allow you to take advantage of this loophole of making separate withdrawal requests if they are too close together. Well actually, they will let you make the requests and they will process them, but they will add up the total amount of the separate requests and have a balloon withholding tax amount on the last withdrawal. One way to avoid this would be to make withdrawal requests from separate RRSP accounts or RRSP issuers if you have more than one.
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Comment by Carole on 17 September 2008:
My current situation is such that I need to withdraw $10,000 from my RRSP rather urgently. I’ve contacted the firm which handles my small retirement portfolio and asked them to arrange two withdrawals of $5,000 each at one week’s interval, in order to keep the withholding tax at 10%. This is something they’ve arranged for me in the past without any problem.
The client service representative with whom I spoke today, however, informed me that the Canada Revenue Agency has changed the rules regarding the withholding tax and that I now have to wait 30 days after the first withdrawal before making the second one; otherwise, I’ll have to pay 20% withholding tax on a cumulative withdrawal of $10,000.
As this mirrors exactly what you describe in your last paragraph, the “new rule” could be something the issuer of my RRSP has implemented since I last had to withdraw more than $5,000. If that is the case, I have no choice but to accept their way of doing things. What puzzles me is that the service rep made it a point to tell me this was NOT the issuer’s policy, but a new government regulation.
I’ve been searching the Web for hours and cannot find confirmation of this rule change anywhere (least of all on the CRA’s meagre website). As far as I can tell, what was true in 2007 still holds true: as long as the withdrawal requests are made on different days, each withdrawal is subject to the 10% rate of withholding tax.
Did the government really change the regulations this year? Or was my service rep misinformed by the RRSP issuer? I would like to know what’s what when I get back to her on this matter. If this is the issuer’s policy, then they should own up to it instead of shifting responsibility to the government, don’t you agree?
Thank you SO MUCH for your most informative blog. I’ve bookmarked the site and will be returning often.
Comment by Preet on 17 September 2008:
Hi Carole, while the rules have not changed as far as I can see, I too have heard from some people in the office that a firm’s RRSP administration department are including balloon withholding on subsequent withdrawals within certain time periods.
Assuming we are talking about separate firms, it may very well have been a request from CRA. While it may not help much now, the actual tax owing will be settled come tax time and any overpayment will be refunded when you file your next return. The firm would have no incentive to hold back the higher amount of tax so it sounds like it could have been a request by CRA. Sorry I don’t have a definitive answer for you…
I’m glad you find the blog useful, and thanks for asking your question – they are always welcomed.
Comment by RRSP Newbie on 19 January 2009:
I love how simple you have made it, works for regular folk like me!
I am curious about this hypothetical scenario however:
2008 Income = $50,000
2008 RRSP Contribution = $5,000
2009 Income = $50,000
2009 Contribution = $0
2009 RRSP Withdrawal = $5,000
When I file my 2009 taxes in 2010, I know my income would be $50,000 + $5,000 = $55,000 for 2009 because I made a withdrawal.
My question is, will the refund I get in 2009 because of my contribution in 2008 be equal to the extra tax I pay in 2010 for my total 2009 earnings? Would I break even, come ahead or be a little behind?
Comment by Preet on 19 January 2009:
@ RRSP Newbie – in theory you would break even. This is because the 31.15% tax bracket (in Ontario) ranges from well below $45,000 to well above $55,000 (which is what your example’s annual incomes would be for those two years). In reality, there might be a few dollars of wiggle room as tax credits and the basic personal exemption, etc change a bit from year to year. But we’re talking literally a few bucks in this case.
You can look up your province’s tax brackets by searching on this page.
Comment by RRSP Newbie on 1 February 2009:
Thanks for the quick response Preet, it’s good information!
I have continued my reading on RRSPs on the CRA website and have another scenario which I could not find an answer to. I would appreciate your opinion/thoughts on this:
2008 Income = $50,000
2008 RRSP Contribution = $5,000
2009 Income = $50,000
2009 Contribution = $0
2009 RRSP Withdrawal for education = $5,000
The withdrawal for education is made using the the life long learning plan (assuming I meet all the criteria) so I don’t get any withholding tax. The CRA website talks about some sort repayment to back to the RRSP. Are you essentially taking a loan from your RRSP at 0% interest?
If I were to make a $5,000 contribution to my RRSP in 2010, would that $5,000 be first used to clear my “loan” balance for the withdrawal in 2009? As in I would not be able to deduct it from my income in 2010 to get a tax break?
Comment by Preet on 1 February 2009:
@ RRSP Newbie: Yes, it is a 0% loan from your RRSP so long as you make the minimum repayments. If you don’t, then the minimum repayment amount is added to your income and you would owe tax on that amount (at your marginal rate). The $5,000 contribution (in your example), would first go to paying your minimum amount owing for HBP repayment, and then you could decide whether you wanted to apply it against the HBP repayment beyond that (and not get a deduction, but reduce your future annual repayment amounts) or use it to generate a deduction now.
Comment by x on 2 February 2009:
Check YOUR MATH!!!!
One thing to note is that if you ask your RRSP issuer for $5,000 NET (meaning that is how much money will be transferred to your bank account AFTER deducting withholding taxes) then that puts you in the $5,001 – $15,000 withdrawal range, since in order to provide you with $5,000 net, they will need to de-register $6,000 GROSS (20% of $6,000 = $1,000 withheld).
20% of $6000 is $1200
Comment by Preet on 2 February 2009:
@ x – thanks for pointing that out. Post has been amended.
Comment by Shelley on 9 March 2009:
If my contribution limit for 2008 is $20943.00 and I contribute $19459.00 plus 6333.33(the 6333.33 I withdrew earlier in the year)am I overdrawn on my limit? I borrowed to mae up for what I withdrew but now I am hearing I cannot do that. True or false??
Comment by Luigi on 2 July 2009:
Preet, quick question:
Does a RRSP withdrawal in January/February 2010 counts as income for 2009, in the same way a contribution on the same period would count as 2009?
In short, is the “first 60 days rule” also valid for withdrawals?
Comment by Preet on 2 July 2009:
@Luigi – as far as I know, withdrawals count for the actual tax year in which they are made. Jan/Feb 2010 withdrawals will count as deregistrations for the 2010 tax year. Cheers
Comment by Derek on 29 December 2009:
Withholding tax regulations suck. You should be allowed to deal with the taxes at tax time.
There should also be a provision whereby if you can make a withdrawal and pay it back within the same tax year to avoid any penalties.
Comment by Adam on 17 January 2010:
My wife and I are newly married and plan to start a family in the next couple of years. Ideally she will be a stay at home mom, and I will bring in all of the income for the family.
Three questions;
Would it be a wise strategy to contribute heavily to her RRSP with the intention of making withdrawls when she is at home with no income?
I have substantial contribution room in my own RRSP. Can I use some of this to contribute to her RRSP account
What do you think of this strategy
Comment by Nav on 17 February 2010:
When i intitially got RRSP it was $5000 but now since my advisor invested it in a good place it is $7000 (just got the statement). Does that mean that $7000 is mine and i can withdraw $7000 now if i want??
Also i m buying a second house so i need the money. Is there any loophole to go around first time buyer plan.
Just to mention the house i m buying now after selling my first one is with my dad and brother (who have never owned a house). Can we work something on that.?? please help