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Borrowing from Your RRSP

    If you’re a Canadian who’s saving for retirement, you probably already know about RRSPs or Registered Retirement Savings Plans. Each year, Canadians collectively contribute billions of dollars to their RRSPs, making them the nation’s most popular way to save up for the golden years. Statistics show that in 2015, over $40 billion in RRSP contributions were made. That’s not the only thing statistics can tell us, though. Even though these contributions are meant to be socked away for the (often distant) future, the most recent data shows that nearly 2 million Canadians make early withdrawals every year.

    Financial calamities sometimes can’t be avoided, but withdrawals from retirement savings carry their own issues. The tax penalties are the most obvious strike, but there’s also the dangers involved in dwindling the savings that will be all-too important down the road.

    …and what are those tax penalties?

    Early withdrawals are subject to withholding taxes, excluding a couple of specific exceptions. Expect to pay between 10-30% on the amount withdrawn (this portion will be held back by your financial institution and sent to the government.) The precise amount varies depending on where you live and the amount that you’re pulling out of the account:

    • 10% on amounts up to $5,000
    • 20% on amounts over $5,000 up to including $15,000
    • 30% on amounts over $15,000

    *** Divide these percentages in half if you’re a resident of Quebec, but be aware that you’ll be required to pay provincial withholding tax on top of that listed above.

    And what of the exceptions? The Home Buyers’ Plan and the Lifelong Learning Plan both allow Canadians to borrow from their RRSP either to buy or build their first home, or to finance their education, respectively. Both of these exceptions still require the borrower to pay back the money withdrawn within a certain timeframe to avoid taxes. For the HBP, the time is 15 years; for the LLP, it’s 10 years.

    These two programs are the only means – apart from retirement, of course – through which it’s recommended to tap into an RRSP.

    What happens when you need the money?

    Almost everyone has faced a financial emergency at some point in their lives. It can happen when someone in the household loses their job or requires hospitalization, or for any number of other reasons.

    If you’re impacted by this type of situation, taking money from your RRSP should be looked at as an absolute last resort. Before going down that road, look to any assets that aren’t tax sheltered first. Savings bonds or guaranteed certificates can be tapped without incurring unnecessary taxes.

    One other bit of advice:

    If debt is the reason you’ve landed on this article, don’t be hasty. You should not withdraw from your RRSP to pay off debt without first consulting a professional. A credit counselor will be able to help you explore all available options before making a decision that results in tax penalties and a large hit to your retirement plans.


    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

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