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withholding tax on RRSP - What age?
March 21, 2018
6:00 pm
Save2Retire@55
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Hello again!

I have been trying to find out a good answer with no luck. Let's say I want to retire @ 55 and would like to start withdrawing RRSP @ 60 (or even earlier). Will I have to pay withholding tax plus income tax? At what age the withholding tax is eliminated (please don't tell me 65 or 67 as I might not even live till then)!

Thank you

March 21, 2018
6:51 pm
Bill
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Save, here's a link that might help:

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/making-withdrawals/tax-rates-on-withdrawals.html

Note that withholding "taxes" for residents of Canada are really just a prepayment (like a source deduction) of income taxes for the year. They are not an additional tax in addition to income taxes. The phrase "withholding taxes" is misleading - and it seems that some financial advisors don't clarify that for clients, i.e. they suggest it's best to keep the money tied up in your registered account with them or else you'll be paying these extra taxes called withholding taxes if you cash out. Not true.

March 21, 2018
7:21 pm
Rick
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You have to pay withholding tax when you withdraw no matter what...there is no limit that kicks in at a certain age. The link Bill supplied shows the amounts. Whether or no you have to pay taxes depends on your income for the year, including RSP withdrawals. They get you coming or going. Here is a cut n paste from getsmarterreinvesting.ca you should also be aware of.

Your financial institution may apply the withholding tax based on the total amount of multiple withdrawals depending on how often you make them. Speak to your financial institution to learn more about making multiple RRSP withdrawals, and track your withdrawals throughout the year to ensure you are aware of the additional amount you may owe when you file your annual income tax return.

So even if you take out 3 X 5,000, you may end up getting nailed for 20% instead of 10. Timing is everything.
I'm not going to worry too much, we'll have to pay tax no matter what so might as well have them take it @ source. Think of it as the tax they take off your paycheque now. Also, if you owe too much tax, CRA will insist you start making quarterly payments. That's what I'm trying to avoid, but I've just recently retired so have to get back to you on how that's working out.

March 21, 2018
7:35 pm
Wayno
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Save2Retire,

1. Will I have to pay withholding tax plus income tax?(YES)
2. At what age the withholding tax is eliminated (please don't tell me 65 or 67 as I might not even live till then)! (NEVER)

... I will try to explain ....

Look at RRSP as a way to MANAGE the tax being paid on your TAXABLE INCOME ... i.e. You still end up paying tax on the withdrawals.

... GOOD if you pay less tax over a long period of time .. BAD if you end up paying more tax over a period of time... TAXES paid are dependent on your Taxable Income and Tax Rate for the year that withdrawals are made.

...The income earned in your RRSP is not taxed until it is withdrawn. While your investments sit in your RRSP, their growth is tax sheltered and so the total value may grow more quickly. The theory is, by the time you begin to withdraw the funds at retirement, you MAY be in a lower tax bracket than during your earning years. However, if your taxable income is greater when you retire ( e.g. Interest, CPP, OAS ) then you end up in a higher tax bracket then you end up paying MORE tax ...

..BTW What is MORE important is to start to understand the TAX Brackets and the Marginal Tax Rates over a period of years. It took me some time to really understand how important this is and how to reduce my taxes.

RRSP Withdrawals
Money withdrawn from a RSP, is treated like INCOME.sf-cry

When you withdrawal money from an RRSP you are immediately subject to a RRSP WITHHOLDING TAX and then when you file your income tax you may pay more tax because your (Total Income) .. i.e Taxable Income has increased. sf-cry

RRSP WITHHOLDING TAX
There are three levels of percentage withheld, depending on the amount of your withdrawal: Up to $5,000 will have a 10% (5% in Quebec) withholding tax. $5,001 to $15,000 will have a 20% (10% in Quebec) withholding tax. $15,001 or more will have a 30% (15% in Quebec) withholding tax

... I hope that you can see that you have asked simple questions, however, RRSP are a lot more complex and are not really explained well by the financial institutions who want to position it as a "savings plan". Really its for managing your taxable income - to reduce year to year taxes.

March 21, 2018
7:39 pm
Kidd
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Bill is correct.

You can withdraw money from your rrsp at any age and withdraw any amount you want. Your rrsp holder will withhold tax from your withdrawal. At income tax time, the total rrsp amount withdrawn will be classified as an income. Then on page 4 of your T1 form, tax paid. The amount of tax your rrsp holder paid (withheld) goes here.

Example. Say you pull $24,000 from your rrsps. Approximately $5,500 will be withheld in tax. So you actually only get $18,500 in your hand. You will get a T4 rrsp slip

At Income tax time.... line 130. Other income 24,000. Line 437 tax paid, $5,500.

NOW... the percentage of tax withheld changes with the amount withdrawn. Small withdrawals will have no tax withheld. Larger withdrawals will have a larger % of tax withheld. NO MATTER WHAT. ALL money withdrawn has to be declared as income. The bank tells the cra by law that you received rrsp money, whether it is $100 or $1 million

March 21, 2018
7:44 pm
Norman1
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Bill said
… They are not an additional tax in addition to income taxes. The phrase "withholding taxes" is misleading - and it seems that some financial advisors don't clarify that for clients, i.e. they suggest it's best to keep the money tied up in your registered account with them or else you'll be paying these extra taxes called withholding taxes if you cash out. Not true.  

I agree.

It is actually a "tax withholding" and not a "withholding tax". The tax withholding from an RRSP withdrawal will be shown in Box 30 of the T4RSP slip. The amount withheld will be credited, on Line 437, against any taxes that are owing. Just like the taxes withheld from paycheques.

March 21, 2018
7:56 pm
John Wayne (Marion)
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But keep in mind if you control your RRSP withdrawals by flushing them through a RRIF account the amount withdrawn will be "splittable" income with your spouse. And also when you become of age of mandatory RRIF withdrawals there is no Tax Withhold mandatory amount. BUT any amount over the mandatory withdrawal will be subject to a Tax Withhold.

March 21, 2018
8:06 pm
Kidd
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Added note... i am retired. My first full year of retirement, i switched my rrsp to a rif, even though i was a few years away from 60. I knew that i would never make another rrsp contribution and i needed to spread my withdraws out over a longer period of time to reduce my tax bracket. Right now, i take 2,000 a month out of my rif and after doing my 2017 taxes, i owe "your" government more money. So the taxes withheld were not enough to cover the amount of taxes due.

March 21, 2018
9:02 pm
Joe
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Also keep in mind there is a service charge for withdrawing your RRSP...TD bank charges $25 + gst.....so withdrawing smaller amounts (during the same year) doesn't always make sense.

March 21, 2018
11:51 pm
Loonie
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Save2Retire@55 said
Hello again!

I have been trying to find out a good answer with no luck. Let's say I want to retire @ 55 and would like to start withdrawing RRSP @ 60 (or even earlier). Will I have to pay withholding tax plus income tax? At what age the withholding tax is eliminated (please don't tell me 65 or 67 as I might not even live till then)!

Thank you  

I have been making strategic withdrawals from both RSPs and RiFs over the last several years, and have learned a few things from my experiences that were not written clearly in stone.
I find that most of the above responses are largely accurate.

So, here's what I have to add:

TD does charge for RSP withdrawals but they do not charge for RIF withdrawals or closure or for converting part or whole of RSP to RIF - yet (brokerage excepted). Every FI has different rules about this, and you need to check.

The simple answer to your basic question, as others have indicated, is that you will not be taxed twice on the withdrawals. The withholding tax is a payment which counts towards your annual income tax. It is "withheld" from what you receive until your T1 is processed. The amount withheld appears in a certain box on the tax slip that you get from the FI in question, so they don't lose track of it, and there is a slot for it on your tax return as a credit towards taxes owing (I believe it's included in line 437 but would need to get out my tax files to confirm that). You may get a refund in the end, or you may need to pay extra, according to your assessment. Whether you call it withholding tax or tax withholding is immaterial. It is withheld from you either way.

The withholding tax is never eliminated. It applies to every withdrawal.

Good idea to start thinking about possibility of early withdrawals. It all depends on calculations of income for the future and spreading it out and keeping it as low as reasonably possible. Once you hit 65, there are more losses from higher individual income due to Age Credit loss, possible OAS clawback etc etc., so it's good to get some out of the way before then if it works for your income level. But there are also more possibilities for income-splitting after 65, which is of benefit when incomes of couple are unequal.

If you convert your RSP to RIF before required at 71, then there is a mandatory withdrawal which is required, i.e. an amount which you must withdraw annually. This amount is a percentage, and depends on the age of the younger spouse (as long as you remember to ask for it to be set up based on younger spouse's age). This mandatory withdrawal does NOT have a withholding tax deducted at source. If you choose to withdraw an additional amount above the mandatory, then the withholding tax kicks in on that extra amount.

You can minimize withholding tax by spreading your withdrawals among plans, if you have more than one. Let's say you intend to withdraw about $10,000 from your RSP and you have two plans in 2 different FIs from which you could withdraw it. If you take 10K out of one plan, you will pay 20% withholding tax, but if you take 5K out of each of 2 plans/FIs, you will only pay 10%. Further to that, if you take the funds out in smaller amounts through the year, the FI may only charge you the rate for the withdrawal in question, one at a time. The wording on what they are supposed to do is, in my opinion, a bit vague. I was surprised last year that, when I made two withdrawals from the same plan a few weeks apart, the withholding tax on the second, smaller, one was levied as if it were the only withdrawal, so I benefitted.

While it is all well and good to try to minimize withholding tax by timing your withdrawals and being careful about the amount, you need to remember that if your withholding tax is held to, say, 10%, then the amount you owe next April may be higher. This is OK, as it's always good to postpone paying, BUT you need to try to keep that amount under $3000. If not, you may in due course be subject to mandatory quarterly payments to CRA in anticipation of your tax bill and you probably won't be any further ahead. Assuming you are going to have total tax bill of at least 3K, your goal is to keep the amount due in April to a bit less than that, allowing for errors. This is quite a difficult calculation if income fluctuates from year to year though, so be careful. Income splitting will also messup your calculations if tax was withheld there too.

Bear in mind too that you are still a relatively young person, as I understand it. Rules can change, and likely will, before you hit 55 or 60. A few years ago, for instance, they changed the minimum mandatory percentage withdrawals from RIFs in recognition of increasing longevity. CARP is currently lobbying for the elimination entirely of mandatory withdrawals from RIFs.

The government is going to get its slice no matter what you do because RSPs are only tax-deferred, not tax-exempt. However, you can have some control over the amount withdrawn in a given year (which impacts the amount of tax ultimately paid) and you may be able to delay payment until April so as to keep the interest earned in the interim. It's best to make these kinds of withdrawals decisions in November or December, by which time you have a fairly clear idea of your income situation for the year, but that also means you need to have funds available at that time - ideally GICs maturing. Some people, however, may be depending on monthly income from the RSP/RIF, so should act accordingly.

Wayno is correct that RSPs should not best be looked at as a retirement plan per se but as an income-averaging system to manage your taxes. Once you get your head around that (and it sounds like you have), then it's easier to sort out. It took me too long to figure this out, which has cost me money.

So, there are a lot of things to consider in how you arrange your withdrawals!

I can recommend a couple of books on retirement income planning if you like, but, of course, the advice too will change with time. You could easily postpone this until age 50 or so, but there is the possibility that, if you read them now, you might see your current planning differently. Things do change a lot when you start looking at your nest egg as something to draw on rather than to grow. Not only do the rules change, but the mindset changes, and it can be a difficult adjustment. I find that I am still a saver at heart, and I find it difficult to be a spender, strange as that may sound. The dog may get old but the spots don't change!

March 22, 2018
1:11 am
Rick
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Lots of good info here. Only been retired for 4 months I've had a few concerns as won't get a full picture until my wife retires and her pensions kick in. I'm still not positive what the magic number is to keep our combined income under to avoid clawbacks once we hit 65. Pension splitting, CPP benefit, interest, RSP's, how long are we gonna live,lot of variables.
Thanx for the tips Loonie, few things I've not considered but will undoubtedly utilize. Nothing beats the voice of experience.

S2R@55. Sounds like you've still got a few years of work left before you cash in your chips. A lot of the tax implications mentioned here could be totally avoided by using your TFSA as your retirement income and minimizing your RSP. If I had the option 30 years ago, that's the way I would have gone.

March 22, 2018
1:22 am
Loonie
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I agree with Rick. If I were youngish today, I would avoid RSPs entirely.

Rick, I know exactly where you're at! Sounds very familiar.
You might want to re-read what I wrote as I've made some changes. I think some of it was a bit misleading earlier.

March 22, 2018
7:47 am
John Wayne (Marion)
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Joe said
Also keep in mind there is a service charge for withdrawing your RRSP...TD bank charges $25 + gst.....so withdrawing smaller amounts (during the same year) doesn't always make sense.  

Hi there....I have never paid for a withdrawal for RRSP or RRIF. Must be FI some specific.

March 22, 2018
7:54 am
John Wayne (Marion)
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Rick said
Lots of good info here. Only been retired for 4 months I've had a few concerns as won't get a full picture until my wife retires and her pensions kick in. I'm still not positive what the magic number is to keep our combined income under to avoid clawbacks once we hit 65. Pension splitting, CPP benefit, interest, RSP's, how long are we gonna live,lot of variables.
Thanx for the tips Loonie, few things I've not considered but will undoubtedly utilize. Nothing beats the voice of experience.

S2R@55. Sounds like you've still got a few years of work left before you cash in your chips. A lot of the tax implications mentioned here could be totally avoided by using your TFSA as your retirement income and minimizing your RSP. If I had the option 30 years ago, that's the way I would have gone.  

Rick said
Lots of good info here. Only been retired for 4 months I've had a few concerns as won't get a full picture until my wife retires and her pensions kick in. I'm still not positive what the magic number is to keep our combined income under to avoid clawbacks once we hit 65. Pension splitting, CPP benefit, interest, RSP's, how long are we gonna live,lot of variables.
Thanx for the tips Loonie, few things I've not considered but will undoubtedly utilize. Nothing beats the voice of experience.

S2R@55. Sounds like you've still got a few years of work left before you cash in your chips. A lot of the tax implications mentioned here could be totally avoided by using your TFSA as your retirement income and minimizing your RSP. If I had the option 30 years ago, that's the way I would have gone.  

Keep in mind for your planning to plan for the lowest taxable income as possible for your later years to enable best benefits for income based programs like PharmaCare in BC or similar in another province.

March 22, 2018
8:03 am
Loonie
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Mary said
But keep in mind if you control your RRSP withdrawals by flushing them through a RRIF account the amount withdrawn will be "splittable" income with your spouse. And also when you become of age of mandatory RRIF withdrawals there is no Tax Withhold mandatory amount. BUT any amount over the mandatory withdrawal will be subject to a Tax Withhold.  

The pension income splitting on RIF only applies when the RIF owner is at least 65. Same for the Pension Tax Credit of $2000 if you don't have any other creditable pension source than RIF. However, OP was asking about age 55-60.

Mandatory RIF withdrawals begin the year after you create the RIF regardless of your age at the time. The mandatory rate increases a bit every year.

March 22, 2018
8:26 am
John Wayne (Marion)
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Loonie said

The pension income splitting on RIF only applies when the RIF owner is at least 65. Same for the Pension Tax Credit of $2000 if you don't have any other creditable pension source than RIF. However, OP was asking about age 55-60.

Mandatory RIF withdrawals begin the year after you create the RIF regardless of your age at the time. The mandatory rate increases a bit every year.  

Good point. I forgot about that because I have been over 65 for awhile. But while you are under 71 you can manipulate withdrawal(s) from RRSP to RRIF and then withdraw RRIF all in the same month or two. Multiple withdrawals of $5000 or less have benefits. Leave a $100 in your RRIF account till next year.

March 22, 2018
10:22 am
Rick
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Mary said

Keep in mind for your planning to plan for the lowest taxable income as possible for your later years to enable best benefits for income based programs like PharmaCare in BC or similar in another province.  

thats the idea. Welcome to the forum Mary! sf-laugh

March 23, 2018
5:21 pm
Save2Retire@55
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Thank you so much everyone. I wonder why I couldn't find a single article making the whole thing as clear as you explained. Till then, and honestly, I read about the RRSP rules many times a year, I thought I am going to pay some kind of fees as "punishment" for withdrawing. At least, that's how they make you believe and I have no idea what's the percentage of Canadians who actually know the facts.

Now I totally understand the point of putting money in RRSP if your retirement income is going to be less than your current income. I hate what I pay in income now and putting the whole 18% will really help lowering my tax now. Our plan is to not go over $30K/year (again nobody can really figure out numbers or predict future but we really want to live 6 months in somewhere cheap (and warm) which can be anywhere from Guatemala to Malaysia (No fancy typical Americanized places for us) - different place / year). Less expenses (if we won't need hospitals and kids settle down).

Loonie and Wayno - Special thanks for the detailed explanation.

Loonie and Rick - TFSA is def a good way to do it ... Our income (well, for now 1 income only), is not huge at all but we are good savers (Thanks to online sites like Zulily, Amazon, Ebay, Aliexpress) and reasonable spending (Except crazy expensive travels), we save good amount of money. Based on the last 5 years experience, we could contribute 18% to RRSP and also max our TFSA. So yes, we are doing both but we stopped doing RESP for now. I am hoping the kids be smart enough and can work / get scholarships + living with us till graduation. RESP seems to be a lot of work, and headache plus no one is really offering any good rate (Those who do charge you a lot of money which eliminates the whole government contribution of 20-40%). Questrade is good but as I mentioned in other threads, I stopped playing with it (It is scary and crazy + needs patience which I don't have) but left what we have there for now without any more contribution (for now anyway).

To answer the age question, I have a bit over 2 decades to reach that 55. Having many of you as my online community is a blessing which makes my life much easier 🙂

March 23, 2018
7:17 pm
Norman1
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Save2Retire@55 said
Now I totally understand the point of putting money in RRSP if your retirement income is going to be less than your current income. I hate what I pay in income now and putting the whole 18% will really help lowering my tax now. …

It could still be worthwhile when retirement income is a bit more than income when the RRSP contributions were made.

Earlier, I did some calculations around a case where $400,000 of RRSP contributions were deducted at an average of 32½% and the $1.3 million of withdrawals were taxed at a higher average of 40%. One ends up paying income taxes of 16.05% on the gains, as if the gains were capital gains.

March 23, 2018
10:39 pm
Loonie
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Savetoretire- do you mean that you and your spouse are aiming for a retirement income of 30K each annually?

If so, I'm wondering how you came up with that number. It's lower than what I would consider the "sweet spot", something over 37K, i.e. the point at which the Age Amount starts getting clawed back.

While this figure gives the best bang for your buck, keeping taxes to the minimum etc., it's not going to be achievable for everyone, or necessarily desirable. Some people want or need a higher income for their lifestyle. Some are going to have more income no matter how early they start withdrawing. And some are never going to achieve this minimum.

The best advice I can probably give to someone your age is to revisit your whole situation regularly, recalculate and revise the plan annually. Things change, both in your personal and family life and in government policy, not to mention the rest of the world where you might plan to travel.

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