# RRSP: early withdrawals



## dumbmoney (Apr 9, 2011)

I'm thinking of saving some bucks in an RRSP because I expect to be able to save more than the $5k that the TFSA gives me. Plus, I get the immediate joy of a tax refund so I'm thinking of the RRSP. 

I'm a fresh grad with a full-time job starting in a couple of months. I plan on going back to school in 2-3 years for an MBA degree which will cost me an arm and a leg (expecting >$80k for the schools that I'm considering). I plan on withdrawing from the RRSP and TFSA during that time period to pay for school and life in general when I will have no income at all. 

What I don't plan on doing is using the LLP, as I am expecting to move away from Canada after my MBA so that I don't have to pay back those the loan from my RRSP (why am I given a loan with my own money anyway?). I won't be taxed heavily anyway so it doesn't matter. My investment horizon is thus under 5 years.

Anyone see any problems with my plan (aside from what if I don't leave Canada)?


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## sprocket1200 (Aug 21, 2009)

yes, do the rrsp so you can draw it out when you have no income during MBA years. your biggest mistake is being excited about that 'refund'. it is your money, don't let the gov't use it for more than a year without interest!

go to you employer and ask that they reduce taxes at source (for td1 I believe). it asks on their how much your are putting into rrsp. then you get to keep that money and not have the tax man hold it for nothing!

good luck


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## Rico (Jan 27, 2011)

You'll lose the RRSP room forever but since you're leaving Canada that shouldn't matter.


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## dumbmoney (Apr 9, 2011)

@Rico: Yes, I'm aware that I lose the RRSP room forever once I take out the money, which is why I mentioned that I won't be needing that RRSP in a few years.

@sprocket: interesting. Thanks for letting me know.

I also became aware that the withholding tax is money that the government holds onto if I ever withdraw money early, but will be returned to me when I get my tax returns. I was advised that I should withdraw from the account in separate periods so I don't lose all the opportunity cost right at the start of the year?


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## Rico (Jan 27, 2011)

Yeah, tax is withheld on withdrawals as a matter of course. So, pulling lots of money out in mid-December and getting your refund back early in the year would be ideal. Also, you could spread out the withdrawals (but they'd have to be spread out enough not to be "lumped" together - I believe it's 30 days between).

"Withholding Taxes
Funds withdrawn from an RRSP will be charged withholding taxes. This amount must be held back by the plan administrator and remitted to the government on your behalf.

Effective January 1, 2005, the following withholding tax rates apply:

Amount of RRSP Withdrawal	All Provinces Except Quebec	
Up to and including $5,000 . . . . . . . . . . . .10%	
$5,000.01 to $15,000. . . . . . . . . . . .20%
More than $15,000.01	. . . . . . . . . . . .30%


Here's a good link about this:

http://wheredoesallmymoneygo.com/minimizing-the-rrsp-withholding-tax-on-withdrawals/


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## dumbmoney (Apr 9, 2011)

Thanks for letting me know about the 30-day thing! Good to know


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## cardhu (May 26, 2009)

DM ... your plan makes sense, for the circumstances you describe ... if you truly will have no income in the years you’ll be going back to school, then the RRSP will be more beneficial to you than TFSA, but school years often don’t coincide exactly with tax years, so you’ll have to judge accordingly. To minimize the withholding tax, make sure that your withdrawals are all made by individual increments, by separate request, of less than $5000 each. . If you make arrangements for periodic withdrawals then all of those periodic withdrawals will be treated as a single withdrawal, for the purpose of determining the appropriate withholding. 



dumbmoney said:


> (why am I given a loan with my own money anyway?)


LLP is not a loan ... it’s a withdrawal ... not the same thing ... if it were a loan, you’d be required to pay it back, and with LLP, you are not ... you are instead given the choice of paying the deferred tax attributable to that withdrawal sooner, or paying it later. 



dumbmoney said:


> Thanks for letting me know about the 30-day thing! Good to know


I doubt that this 30 day thing is real ... in the context of RRIF withdrawals, CRA tells issuers (financial institutions) to use their discretion in deciding whether to lump multiple separate withdrawals together for the purpose of determining the applicable withholding ... in other words, there is no hard-and-fast rule for RRIF withdrawals and I assume the same would be true of RRSPs. 

Rico’s advice is still valid ... you don’t want to make it obvious that you’re breaking your withdrawal down into smaller chunks solely for the purpose of minimizing the withholdings, but don’t expect that putting 31 days between your withdrawals will somehow magically protect you from the higher withholdings. It likely wouldn’t have any bearing one way or the other.


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## jmalias (Aug 10, 2010)

cardhu said:


> DM ...
> 
> LLP is not a loan ... it’s a withdrawal ... not the same thing ... if it were a loan, you’d be required to pay it back, and with LLP, you are not ... you are instead given the choice of paying the deferred tax attributable to that withdrawal sooner, or paying it later.


But, you must pay back the LLP, you can pay it back as much as you want as soon as you want. A scedule of payments will be created after you are no longer in school. mine was 10% per year minimum, no maximum. If you forget to buy a RRSP or do not wish to pay back the LLF, the minimum payment will be added as income for that year.

Unfortunately, you cannot add any of the LLF to your income during school and after school you cannot not claim more than the minimum payment towards your income if say your income is low the year after school and you wanted to not pat back your RRSP.

Only use the LLP if you want to keep your RRSPs and make use of the money for school, it is like loaning money to yourself from your own locked in funds. 

Its so nice of the government to allow us access to our own money.


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## cardhu (May 26, 2009)

jmalias said:


> But, you must pay back the LLP...


NO ... you may *choose* to pay it back, or you may *choose* not to ... there is a world of difference between _“you must”_ and _“you may choose”_. 

The point is that an LLP withdrawal is not a loan ... it’s a withdrawal ... a withdrawal that you may re-contribute if you wish, but a withdrawal nonetheless. 



> _Its so nice of the government to allow us access to our own money. _


You’ve always had access to your own money ... you can draw from your RRSP any time you want to ... the introduction of LLP didn’t change that ... what it did do was it expanded the range of options available to someone who intends to use their RRSP to help fund a return to full-time studies ... they can ... 

1.	withdraw money from their RRSP, subject to withholding, and pay the tax due in the year of withdrawal, but lose the contribution room forever ... (this is what the OP intends to do);
2.	withdraw money from their RRSP, sans withholding, and defer the tax due until a specified period following graduation, but lose the contribution room forever; or 
3.	withdraw money from their RRSP, sans withholding, and later recontribute it, thus preserving the contribution room and continuing the original tax deferral until retirement (or some other later withdrawal). 
4. some combination of any of the above.

Prior to the existence of LLP, item (1) was the only available choice ... now there are several choices ... which choice is optimal depends one’s specific circumstances. 



> _If you forget to buy a RRSP ..... _


A semantic nitpick, perhaps, but you don’t “buy” an RRSP, any more than you “buy” a chequing account ... an RRSP is merely a form of account ... the account may contain things that you buy, but you don’t buy the account. 



> _it is like loaning money to yourself from your own locked in funds. _


Not really ... your own funds aren't locked in ... if they were, you wouldn't be allowed to take an LLP withdrawal from them. 


Sounds like you may have used the LLP without fully understanding the terms and conditions applicable to your withdrawal ... if so, that’s unfortunate, but its hardly the fault of the LLP, or the gov’t.


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