# Early-withdrawal from RRSP - any point?



## globe3 (May 15, 2011)

Hi all,

So I'm fairly new to learning about personal finances. I've only recently learned about RRSP's and the benefits of contributing to them.

My only issue is that I'm fairly young (25) and I'm currently far away from retirement - I have many other things that I'm looking to earmark my money for within the next 5-10 years (car, house, education, etc). My main priority right now is that I'm hoping to go back to grad school in 2-3 years, so I'll need about $50-60k minimum by that time. 

If I contribute and max out my RRSP contributions every year starting now, and if I decide to withdraw my RRSP's before I go for grad school, is that a good idea? I hear there are withholding taxes on top of getting taxed on my withdrawals at my marginal rate when I take them out. 

So technically, if I'm going back to school and I'll be working a partial year (say, in 2013), would it make sense to withdraw my RRSP's in that year when I'm at a much lower tax bracket? Or is there still a downside to early withdrawal in that case?

And another concern - what happens to my RRSP's if I decide to move to another country before retirement, say in a few years? Am I forced to withdraw from my RRSP's and incur the penalties/taxes for early-withdrawal?

Thanks!


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## ChrisR (Jul 13, 2009)

I don't see any reason for you to withdraw from your RRSP, because 2 of your identified goals will allow you to BORROW from your RRSP.

Check out the Home Buyer's plan to see how you can borrow from your RRSP for a 1st time home purchase.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

And check out the Lifelong learning plan to see how you can borrow from your RRSP to go back to school.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/llp-reep/menu-eng.html

The big advantage here is that because you pay the money back over a very generous time frame, you don't lose your RRSP space, which you would if you simply made an early withdrawal.

If you leave the country you have two choices as to what becomes of your RRSP:
1) You can leave it as is, growing tax free until you return.
2) Make a lump sum withdrawal after you leave the country and pay withholding tax (currently 25%).


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## globe3 (May 15, 2011)

Thanks ChrisR!

With regards to the withholding tax, is this a tax that is additional on TOP of the tax payable assessed at your marginal rate that you have to pay upon withdrawal from RRSP? 

Say, if you withdraw $10,000 from your RRSP one year and your marginal tax bracket is 30%. Do you have to pay 30% ($3,000) on top of the withholding tax (25% = $2,500) for total taxes of $5,500? Or how does the withholding tax work?

Thanks so much!


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## ChrisR (Jul 13, 2009)

I believe that the withholding tax only applies if you are a non-resident and not filing Canadian taxes.

So if you pull the money out before you leave - you pay tax on the withdrawal at your marginal tax rate.

If you pull the money out after you are already residing in another country, then your bank will 'withhold' 25% and give it to revenue Canada.


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## ChrisR (Jul 13, 2009)

This is the main reason that it can be advantageous for high-earners to retire to another country. At least for a period of time. ie. To avoid paying high income tax on RRSP withdrawals, and instead pay a one time lump sum 25%.


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## financialnoob (Feb 26, 2011)

http://www.taxtips.ca/rrsp/withholdingtax.htm

When you put money into your RRSP, you don't have to pay tax on it at the time, which is why you can get a big tax return. It's because you're being refunded the taxes collected on the amount you contributed. 

Any withdrawal from your RRSP is declared as taxable income on your tax return since you didn't pay tax on it initially. The withholding tax is simply tax that you may owe being withheld by the bank and remitted to the government on your behalf. 

If they withhold way more than you actually owe, you'll get it back when you file your tax return. Alternatively, you may owe even more than the bank withheld, depending on how that withdrawal affects your income bracket. 

It seems to be interpreted as a penalty when it's not. 

As for your situation, it could work out since you could withdraw the funds as a student when your income is low. The withholding tax would sting a bit, but you'd probably get a lot (and perhaps all) of it back the next year when you filed your tax return. Really depends on the numbers and how much you're contributing and planning on pulling out. Check out some tax calculators. The link above on withholding taxes also has some tax calculators.

One thing is you lose that contribution room forever. And if you're at a lower income right now but plan on being higher income, you may want to save the room for later when your contributions will result in a higher tax savings. Then again, if you're planning on leaving the country, this may not be as big of a factor.


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## cannon_fodder (Apr 3, 2009)

ChrisR said:


> This is the main reason that it can be advantageous for high-earners to retire to another country. At least for a period of time. ie. To avoid paying high income tax on RRSP withdrawals, and instead pay a one time lump sum 25%.


Sorry to threadjack but are there countries which have a treaty with Canada that reduces the withholding tax to 15% or even less?


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## OhGreatGuru (May 24, 2009)

ChrisR said:


> I believe that the withholding tax only applies if you are a non-resident and not filing Canadian taxes.
> ...


No, withholding tax applies whether or not you are a resident, Only the rates are different. For residents the amount of withholding varies with the size of the withdrawal. See http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/wthdrwls/rts-eng.html


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## OhGreatGuru (May 24, 2009)

globe3 said:


> ...
> 
> If I contribute and max out my RRSP contributions every year starting now, and if I decide to withdraw my RRSP's before I go for grad school, is that a good idea? I hear there are withholding taxes on top of getting taxed on my withdrawals at my marginal rate when I take them out.
> 
> ....


If you can avoid it by using some of the strategies suggested here you should not make RRSP withdrawals for your education, because you lose that contribution room permanently. TFSA would be another alternative.


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## OhGreatGuru (May 24, 2009)

globe3 said:


> ...
> 
> And another concern - what happens to my RRSP's if I decide to move to another country before retirement, say in a few years? Am I forced to withdraw from my RRSP's and incur the penalties/taxes for early-withdrawal?
> 
> Thanks!


You may keep your RRSP, but may not make further contributions to it while a non-resident. If and when you choose to make withdrawals they will be subject to Part XIII tax, which is 25%. See:

http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/nnrs-eng.html

You would need to check the tax rules in your country of destination to see if they recognize the tax-sheltered status of RRSPs and the withholding tax you pay on withdrawal. I think most developed countries would recognize the tax-sheltered status; and would treat the withholding tax as a credit for foreign taxes paid on income from foreign sources.

As stated by others, the withholding tax is not a "penalty". You are paying the taxes deferred when you were allowed to deduct the contributions from your income; and the taxes deferred on earnings inside a tax-sheltered account.


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