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Can You Withdraw RRSP Without Paying Taxes?

Can you withdraw RRSP without paying taxes? In normal instances, when you take out money from your RRSP you need to pay the taxes first and you may need to pay more taxes when you file for a tax return in that regard.

RRSPs (Registered retirement savings) makes your retirement stress-free and help you to invest prudently on a tax-deferred basis. You might not have to pay the taxes at the start of your investment, but as soon as you dip your hands into the pot to use the money, the Canada Revenue Agency (CRA) will come knocking on your door to take their share. 

You might be wondering, is there still a way to go around this principle of paying taxes when you withdraw from your RRSP? Yes, there is! And we are here to tell you about it. 

Read: TFSA vs RRSP: How To Choose Between The Two?

Ways to Withdraw RRSP Without Paying Taxes

Here are the 3 ways to take out your money from your RRSP without paying any taxes.

Life Long Learning Plan

If you have the thoughts of attending the school again, an LLP or Life long learning plan gives you the right to withdraw money tax-free from your RRSP account to support your education. 

You are allowed to take out up to $10,000 every year and up to $20,000 in a period of over 4 years. Couples are allowed to withdraw $40,000 for the same conditions.  

Read: All You Need to Know About Canada Fed Deposit in 2022!

HBP or Home Buyers Plan

Canadians can withdraw from RRSP without any taxes via the HBP plan if they plan to build a home. A single person can borrow $35,000 while a couple can borrow $70,000 if both own an RRSP.

To become eligible for an HBP, you need to be a first-time homebuyer. Also, you have to fill the form of T1036. You can take up to 15 years to put back the borrowed money into the RRSP account and make the first payment within 2 years of withdrawal.

Yearly, you have to pay an average of 1/15th of the amount that you borrowed. The scenario is that if you withdraw a total of $35,000, you have to make a repayment of no more than $2333.33 yearly. 

If you fail to comply with the minimum requirement of payment, the left amount is added to your annual income and is levied with tax. 

Read: Understanding Canada’s First Time Home Buyer Incentive

Read: A Simplified Guide On How To Buy A Home In Canada

Low or No Income Withdrawal

In years, where all your income sources are exhausted and you have barely any money coming in, RRSP withdrawal is levied with zero taxes. 

The process for this is as below.

When you cash out the RRSP money, the financial institution will not impose the tax on you in consideration of the CRA. This does not impact the tax bracket you belong to or what your income level is.

For the said time, you are not paying any taxes on federal, personal, or personal amounts. For instance, in 2021, the personal amount limit was $13,808.

If you withdraw lower than $13,808 from your RRSP, and you don’t have any source of income, you will not be needed to pay the federal income taxes.

However, you can still expect a tax refund. For example, the personal amount in Ontario is $10,880 for 2021. Income lower than this amount will lead to $0 provincial taxes for the year.

If you want to withdraw the amounts from your RRSP without retiring, the best way to do so is when your income is low. 

Read: Amazing Investment Options in Canada to Grow Your Money

Cons of Withdrawing Money Early

If you are not withdrawing your RRSP money for LLP or HBP, you will be imposed with taxes. There are some other cons of taking out money early from your RRSP, there are:

Tax Withheld by RRSP

If you are a non-resident in Canada relating to tax purposes, you will be hit with a tax withholding rate of 25%.

On the basis of your tax bracket, you might still have to pay the provincial and federal taxes as due on April 30th.

Read: A Comprehensive List of High-interest Savings Accounts in Canada

Losing Tax-deferred Growth

The goal of long-term investment growth is lost when you withdraw early. Even when you withdraw using the LLP or HBP, there will still be a significant loss of growth that you would have benefitted from otherwise.

Low Contribution Space 

To withdraw RRSP without paying taxes is a crucial point. Withdrawing money other than for HBP and LLP, you are letting go of the contribution room which you cannot add back any time later. 

More Penalties 

If you fail to comply with the minimum HBP and LLP requirements, you are creating an outstanding amount which is then added back to your income in the year, hence you will pay tax for the contribution room that you lost. 

Read: Include This In Your Retirement Checklist In Canada

How to Avert the Tax and Penalties of an RRSP?

If you are in desperate need of money, withdraw from your TFSA instead of RRSP. Mainly because a TFSA is free from taxes and you also have the contribution room to add back funds in the future.

It is best to create a contingency reserve for unexpected expenses or emergencies. You can deposit this money in the TFSA or any high-interest savings account and grow it further. 

You can create an emergency fund through side hustles. As a last resort, you can also take out a personal loan to fulfill your requirement instead of diving firsthand into your RRSP funds. 

Read: All You Need to Know About Annuity Planning in Canada!

FAQs about Withdraw RRSP Without Paying Taxes

Do you need to pay a penalty while withdrawing money from your RRSP?

Ans. If you take out money from an RRSP for buying a home for the first time (HBP) or to fund your education (LLP), you are not needed to pay the penalty and are allowed to add that money back to your RRSP later. 

How much can you withdraw without the burden of a tax?

Ans. If you make any withdrawal instead of HBP or LLP, or a low-income tax bracket, your taxes will be withheld. You can get the return while filing for a tax refund. 

Do people over the age of 65 get taxed for an RRSP?

Ans. Your RRSP withdrawal will be levied with taxes, regardless of age on the basis of your marginal tax rate. If you close your RRSP at age 71 by cashing it out, withheld taxes will be imposed and more to come when tax filing comes. 

Read: What Do You Need To Know About Locked-in Retirement Account In Canada?


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

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