Many Canadians use RRSPs to save for retirement and defer taxes. However, you must begin receiving an income by December 31st of the year you turn 71. That said, some people might feel a need to withdraw part of their RRSP savings much before that. It is important to be scrupulous about withdrawing money from your RRSP as withdrawals have tax implications.
- You want to buy a home
If you’re buying or building a home you may be qualified to withdraw money from an RRSP without it being taxed. This is one of the most common reasons Canadians withdraw money from their RRSP. However, there are certain caveats. You cannot withdraw more than $25,000 and the money must also be paid back within 15 years. Usually, 1/15th of the total amount withdrawn will need to be paid each year. If you do not pay back this amount, it will be added to your taxable income.
- You want to study
Higher education is expensive. The government allows people to withdraw up to $10,000 a year to a maximum total withdrawal of $20,000 over a 4-year period, to study at a designated educational institution. This amount is not taxed but generally must be paid back within 10 years. Some people transitioning between jobs take advantage of this when going back to school to improve their skills.
- You want to pay off a debt
Everyone wants to be debt free. It does not make sense to withdraw money from your RRSP account to pay off minor debts. However, it may make sense to pay off a large debt with a high-interest rate with money from your RRSP. When withdrawing money to pay off a debt, you need to remember that you will be taxed on the amount removed from your RRSP based on your tax bracket. That means a withdrawal could leave you with a hefty tax bill, adding to your money woes, so it’s important to consider the tax implications before a withdrawal.
- You got divorced or laid off
You never know how life is going to change. One day, you may lose your job or get divorced. This not only takes an emotional toll on people but can also make them financially unstable. If you were laid off and do not find a job soon enough, you may need to dip into your RRSP savings to help tide you over. Similarly, if you get divorced, you may find that your income is not enough to pay for household expenses.
Be smart when it comes to withdrawing money from your RRSP. If you need help, check out this RRSP withdrawal calculator. You should also speak to a financial advisor before making any withdrawals. Whatever you decide, weigh the pros and cons carefully.