Most of us do not think about withdrawing from our RRSP until we retire, but in some instances it might make sense to cash in a portion of your savings early to help finance your studies, buy a home or help you get through financial difficulties during the present pandemic. Here are some examples of times you might want to access your RRSP funds.
- If you want to become a homeowner but you are finding it difficult to save up enough for a down payment, through the Home Buyers' Plan (HBP) you may be able to get the financial boost that you need. Under this plan you can withdraw up to $35,000 from your RRSP to buy or build a home provided that you are a first time buyer (defined as not having owned a home in the four year period preceding a home purchase). The amount that you take out is repayable over 15 years. Repayments are made as a RRSP contribution designated as a repayment on your tax return. If you don't make a repayment the amount required will be included as income on your tax return. Contributions must be in the RRSP for 90 days before they can be withdrawn under the HBP.
- If you want to further your education by learning new skills or training for a new career you can enrol in the Lifelong Learning Plan (LLP) that allows you to withdraw funds from your RRSP to fund your tuition and help with other costs. The plan allows you to withdraw up to $10,000 in a calendar year up to a total of $20,000. The funds have to be repaid over a period of ten years avoid it being included as income.
- If you have income volatility an early withdrawal might make sense. Only the HBP and the LLP allow you to withdraw funds from your RRSP tax free if you have no other income in the withdrawal year your tax rate may be low. Alternatively you could move the money from to a TFSA without paying much tax. In both your RRSP and TFSA you need to make sure when you are making withdrawals and paying back that you do not go over your contribution limit in a year.
- If you expect to have a clawback on your OAS and you decide to retire at 60. In that instance your income will probably drop until you reach age 65 when you will start to receive your company pension, CPP, OAS and money from your RRSP. As your total income at age 65 may exceed the OAS clawback limit ($79,054 in 2020) your OAS will be subject to a clawback and 15% tax. It would make sense to withdraw money from your RRSP over these five years probably saving you a lot of tax. If you don't need the money it might make sense to use your RRSP for income until you reach age 70 as each year you defer claiming your government benefits means that they will increase.
However you decide to use your RRSP you need to do it with caution bearing in mind that the intent of a RRSP is to contribute regularly to a fund and let the money grow over the years until you retire. Don't forget that any withdrawals are taxable.
From an article by Margaret Craig-Bourdin