The Best & Worst Time To Make an RRSP Withdrawal

by Pam on February 25, 2010

Withdrawing from an RRSP can be an extremely expensive option due to the tax consequences.  So, unless you are saving for retirement within your RRSP, or you are planning on taking advantage of the Lifelong Learning Plan or the First Time Home Buyer’s Plan, I would not recommend saving within an RRSP investment vehicle.

To illustrate this, suppose you are 25 years old and you have managed to save $5000 in your RRSP.  You end up spending too much money over Christmas and find it impossible to keep up with all your bills.  You decide to withdraw $2000 from your RRSP.

By doing so, you have lost $2000 worth of RRSP contribution room.  You can never get this contribution room back.

As well, you will be subject to a withholding tax of 10% in all provinces (except Quebec where you would have to pay 21%) that would be taken off the top and sent to the government.   So, even though you are withdrawing $2000, you would only get $1800 at the end of the day or even less in Quebec.

You will also need to add the full $2000 to your income for the current tax year, and then depending on your income tax bracket, you will likely have to pay more tax at the end of the year unless you deliberately make an RRSP contribution to offset the withdrawal.

Another disadvantage to making this withdrawal will be the significant loss of growth in your retirement savings plan.  At 25, the loss of growth on $2000 can be staggering when you take into account the loss of compound interest over a period of 40 years.

To determine your own personal loss of growth if you were to withdraw from an RRSP, check out the RRSP withdrawal calculator.

So, from the scenario above you can see that withdrawing from an RRSP prior to retirement can be detrimental.  RRSPs should not be used as rainy day accounts or as an emergency fund.  Instead, work towards building up your emergency fund before contributing any large amounts into your RRSP.  Although you may like the tax refund you get from contributing, if you consider the negative consequences of RRSP withdrawals, you may think twice before contributing more than you can afford.

When is the best time to withdrawal from an RRSP?

Now, obviously there is a good time to withdraw from your RRSP as well.  The best time is when your annual income is low so that when you make an RRSP withdrawal, you won’t end up having to pay as much tax on it.  The whole idea of having an RRSP is that you will likely be in a lower income bracket when you retire, thus making it more tax efficient to withdraw from your RRSP.  If, however, you think it is likely that you will actually end up in a higher income bracket when you are in your retirement years, then I would recommend building your retirement savings in another investment vehicle outside of an RRSP.

For more information on RRSPs, check out my RRSP Page.

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{ 5 comments… read them below or add one }

Maureen September 8, 2011 at 6:45 am

My husband’s registered pension is $66,000. As well as splitting income, how much rrsp should we withdraw each to maximize taxes? Should we try and keep each of our incomes under $41,000 to pay the least amount of tax?
We have other money in savings etc. It is not an issue of spending requirements or long term projection. I won’t be receiving an income until I turn 55, at that point I will be withdrawing from my RRIF. I thought that since I have 3 yrs of no income we could benefit from withdrawing rrsp money to save from paying more taxes at a later time when our income will be higher.
Thanks Maureen

Cleo Hamel September 16, 2011 at 7:20 am

Hi Maureen – Keeping the income for each under approx $41,000 will ensure that none of the money will be taxed at the 22% federal tax rate. By withdrawing now from the RRSP it will reduce the amount that must be withdrawn at the later date and perhaps save some tax by keeping that income a little lower as well. But there are other factors to consider so you might want to talk to a financial consultant before taking action.

Rose Atienza April 7, 2012 at 3:08 pm

My mother-in-law used to live in a seniors home but due to a fall has moved with us. She pays us less than $400/month to cover for accommodation, meals, and utilities.

Are there any tax breaks we can use on our income tax return this year?

Pam April 9, 2012 at 5:52 pm

You may be able to claim the caregiver amount depending on your mother’s age and income. For more information on the caregiver amount, please see If your
mother-in-law qualifies for the Disability Tax Credit and cannot use the
full amount, she may be able to transfer some of the credit to you. She
needs to have a T2201 Disability Tax Credit Certificate completed by her
physician and approved by the Canada Revenue Agency. Once she has approval, she has to claim the credit on her tax return first but can transfer the
unused amount. If you are paying her medical expenses, you can include them with your medical expenses.

Ira Smith April 28, 2013 at 12:42 pm

I just came across this blog, but, the advice is still very helpful to anyone wrestling with the issue.

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