For most people in Canada, saving for retirement is the top priority. The best way to do that is the RRSP or Registered Retirement Saving Plan that has been given protection by the government of Canada. Understanding RRSP withdrawals are very important as it has tax consequences.
One thing that is important to know that a person is not required to pay any tax on the balance of RRSP even if it grows with time. The tax will only become payable when you withdraw the balance. Any amount that has been withdrawn, must be declared in tax returns.
Understanding RRSP withdrawals will help you to calculate and pay appropriate taxes.
What You Must Know Before Making RRSP Withdrawals
There are a few things that you keep in mind before you make any RRSP withdrawals. You will have the option of early withdrawal; however, it will be subjected to the payment of withholding tax. The amount of tax will be calculated according to the amount of withdrawal and your province.
You must know that early withdrawals will affect the value of your saving because these savings are compound over time and any withdrawal will affect the amount of long-term savings.
All the withdrawals will be considered as the income for that year and will be reported to Canada Revenue Agency (CRA).
Calculation of Tax
The calculation of taxes on withdrawal is simple as it depends on the amount of withdrawal and your province. All the provinces except Quebec have the same tax rate which is 10% on the withdrawal of up to $5000, 20% on $5000 to $15000 and 30% on more than $15000. The tax rate in Quebec is 5%, 10% and 15% respectively.
Tax on Withdrawals at Retirement
On the last date of the year, you turn 71, your RRSP terminates and you have to withdraw the balance. However, there are multiple ways of withdrawals.
- Withdraw all the amount at once and pay withholding tax up to 30%.
- You can purchase an annuity from an insurance company to get income plus interest.
- You can convert RRSP into TFSA (Tax-Free Saving Account). This could result in paying small financial penalties for converting RRSA into TFSA but you will be allowed to make tax-free withdrawals from your TFSA.
- You may convert RRSP into Registered Retirement Income Fund (RRIF). You will get multiple benefits of getting a steady income for the rest of your life and saving money by avoiding large withholding tax.
Spousal RRSP Withdrawal Tax
At the time of maturity of your RRSP, you can contribute that to a spouse’s RRSP. The spouse will be able to withdraw RRSP on the last calendar day of the year in which they turn 71.
There are two scenarios when a withdrawal is made. The first scenario is that if the spouse withdraws the money after turning 71, your spouse will be liable to pay tax and you will have no liability. In the second scenario, the spouse withdraws the spousal RRSP earlier. In that case, the withdrawal will be included in your income.