# Withdrawing money from RRSP



## Sherlock (Apr 18, 2010)

Under what circumstances should you take money out of your RRSP (I mean excluding retirement or the HBP)? For example, suppose you need 15k to buy a car, and you have more than 15k in your RRSP, is it better to withdraw that 15k to pay for the car, or is it better to finance the car?

My understanding is that money you take out of your RRSP is taxed when you withdraw it, whereas all the other money you earn is taxed immediately. In both cases, you are paying the same amount of tax (assuming you are not in a different tax bracket). Or are there any other penalties that I'm not aware of?


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## OhGreatGuru (May 24, 2009)

1. You permanently lose the RRSP Room.

2. Unless you have a DB pension plan, you increase your odds of retiring poor.

3. The 15k withdrawal might raise your tax bracket for that year.


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## Robillard (Apr 11, 2009)

When you de-register funds from an RRSP like this, you pay withholding tax, which counts towards your income tax for the year. The rate of withholding is as follows

10% up to $5,000
20% $5,000.01 to $15,000
30% over $15,000

The withholding rates are higher in Quebec. 

So, if you need $15,000, and you de-register that amount from your RRSP, you only end up with $12,500 after withholding tax. Furthermore, the company that administers your RRSP may have administrative charges and taxes GST/HST on top of this (that is on the administrative charge, not on the withdrawal).


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## kcowan (Jul 1, 2010)

I think you should consider an RRSP a deposit for your retirement. If you want temporary holding place for expenses, use a TFSA.


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## Four Pillars (Apr 5, 2009)

I think the only time I would make a non-emergency RRSP withdrawal, would be in a year where my income was very low. 

That way my marginal tax rate would be low and I'd be saving taxes since I would probably be withdrawing at a higher tax rate in the future in retirement.

I'm not saying I would actually do this, but that's the only scenario that makes any sense.


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## the-royal-mail (Dec 11, 2009)

Withdrawing from an RRSP (how are the funds allocated?) to buy a car is a VERY bad idea. This is not an emergency. If your current ride needs to be replaced then you should access tier 2 savings funds for the car, or finance it.

What are you going to do 10 years from now when the car you buy needs to be replaced again? Raid the RRSP account again?

My philosophy is not to touch RRSP $ under any circumstances except a dire life or death emergency and ONLY after all other savings and credit have been exhausted and maxed out.


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## MoneyGal (Apr 24, 2009)

From a financial economics point of view, it is rational to use RRSP withdrawals for consumption smoothing (like the comment TWO above me essentially suggests). If you have a year with lower-than-expected (and experienced) income, withdraw from your RRSPs in order to smooth your consumption over time. 

Why smooth consumption? Because it provides the highest possible standard of living across your lifetime. 

This leaves aside the issue of planning for retirement, saving for retirement, tax issues, etc. These are all valid issues, of course; but from a strictly financial economics point of view they are beside the point: a rational individual will save for smooth consumption and strategic RRSP withdrawals prior to retirement are not inconsistent with this strategy.


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## Four Pillars (Apr 5, 2009)

MoneyGal said:


> From a financial economics point of view, it is rational to use RRSP withdrawals for consumption smoothing (like the comment RIGHT above me essentially suggests). If you have a year with lower-than-expected (and experienced) income, withdraw from your RRSPs in order to smooth your consumption over time.
> 
> Why smooth consumption? Because it provides the highest possible standard of living across your lifetime.
> 
> This leaves aside the issue of planning for retirement, saving for retirement, tax issues, etc. These are all valid issues, of course; but from a strictly financial economics point of view they are beside the point: a rational individual will save for smooth consumption and strategic RRSP withdrawals prior to retirement are not inconsistent with this strategy.


Good point about consumption smoothing.

If I had a year of low income, I would still consider doing some RRSP withdrawals, even if I didn't need the money in order to make use of the low tax rate. This money could be put into a TFSA, open account or pay off part of the mortgage.


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## cardhu (May 26, 2009)

If the purpose of your RRSP is to fund a retirement income (not everyone uses it for that purpose) then under desperate circumstances, it may be warranted to draw money from RRSP before retirement ... buying a car is rarely, if ever, a desperate circumstance ... but there seems to be general consensus that taking an early RRSP withdrawal would be preferable to allowing your children to starve. 

I am all for maximizing my standard of living across my lifetime ... however, I cannot agree that taking an RRSP withdrawal just for the sake of consumption smoothing is a choice that a rational individual would make ... smacks of a _“spend it if you’ve got it”_ approach to life ... a rational individual will make the best choices available to him, and spending (consuming) just for the sake of spending is rarely going to be the best choice. 

Income-smoothing is another variant ... drawing from RRSP during a low-income year, even when the money is not needed, in order to take advantage of a temporarily “low” tax rate ... sounds good in principle, but there is the risk that taking the withdrawal at today’s “low” rate may rob one of the opportunity to draw at an even lower rate in future ... during retirement... this risk arises from the widespread tendency to overestimate the tax burden on RRSP withdrawals during retirement. 

I would consider taking an early RRSP withdrawal during a low-earning year, for reinvestment purposes, if I could draw the funds at a real ZERO tax rate ... otherwise, I’ll just leave it inside ... there is no marginal rate in this country low enough to make an early withdrawal worthwhile, for me. 

Factoid ... in 2008, more than 800,000 young people (aged between 20 and 45) drew from their RRSPs ... the average withdrawal was about $2,500.


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## pacman (Sep 6, 2009)

In my case, my wife has an RRSP that we plan to start systematic withdrawals starting in 2011. I am 50, still working, my wife has zero income. The withdrawals are to purely minimize tax. I would transfer the funds into a non-registered account. I am currently maxing out on my own RRSP. The annual withdrawals would be about $20,000. I see this as a good strategy to minimize tax. Am I missing something? 

pacman


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## cardhu (May 26, 2009)

pacman said:


> In my case, my wife has an RRSP that we plan to start systematic withdrawals starting in 2011. I am 50, still working, my wife has zero income. The withdrawals are to purely minimize tax. I would transfer the funds into a non-registered account. I am currently maxing out on my own RRSP. The annual withdrawals would be about $20,000. I see this as a good strategy to minimize tax. Am I missing something?


Well, there's the distinct possibility that this plan could increase your taxes instead of decreasing them. Depending on which province you live in, the tax burden on your wife's early withdrawals may be anywhere from 20% to 28%. Depending on your circumstances, and especially if you don't have a defined-benefit pension, the tax burden for withdrawals in retirement could be significantly lower than that.


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## GeniusBoy27 (Jun 11, 2010)

Well, in the circumstance of 0 income, it'd make sense to withdraw some RRSP money, since you're not getting taxed on that anyway.


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## pacman (Sep 6, 2009)

cardhu said:


> the tax burden for withdrawals in retirement could be significantly lower than that.


I'm not following. Why would the tax be lower in retirement than now?

pacman


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## cardhu (May 26, 2009)

In pacman’s case, yes they would be taxed on that withdrawal … likely something in the range of 20% to 28% … so it wouldn’t make sense unless the future tax burden will be substantially greater than the current tax burden … at present, pacman is [presumably] claiming the spouse amount tax credit … if she begins drawing from RRSP, he will begin losing that credit, and HE will pay tax on HER withdrawal, at a rate of 20% to 28%, until the credit is reduced to zero, after which the tax burden shifts to her, again at something in the range of 20% to 28% unless she has some non-transferable credits available to her.


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## Kirkland (Sep 15, 2009)

Theres only two scenarios I know that you should withdraw money from your RRSP :-

Home Buyer's Plan 
Lifelong Learning Plan 

Dont withdraw money from your RRSP for petty purchases, you will lose your contribution room and you'll be taxed on the money. You'll regret the new car when you turn 60 and you're broke.


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