Advertisement
David is shocked by how much tax is deducted from his RRSP withdrawals, despite his low income. What are his options?
Q. As a recent retiree, I am receiving CPP and OAS, and have a small company pension. As a resident of B.C., I am subject to tax of 5.06% for the first $40,707 of income. My projected taxable income for the 2019 tax year will be less than that—$30,500, including the RRSP withdrawal mentioned below.
After taking my first RRSP withdrawal of $12,000, I was shocked that 20% tax was withheld. I understand the current rate of RRSP withholding tax is 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000.
Since the 2019 Canada Federal Tax Bracket for the first $47,630 is subject to a 15% tax rate for “Other Income” and much less for capital gains and Canadian dividends, can I apply for a Request to Reduce Tax Deductions at Source? Or, is there an alternate applicable method? And, how much of a reduction should I ask for?
–David
A. Hi David, you are not alone: Many people are surprised at the taxes withheld on an RRSP withdrawal.
The concept of the RRSP is great in theory. You save while you are making money and you get a tax deferral. When you retire and start withdrawing funds, you won’t need a high income (and likely won’t have one), so therefore would pay less tax and the RRSP funds would last until you die.
The tax rules are clear. You can contribute to an RRSP until age 71, after which time you must move your RRSP over to a Registered Retirement Income Fund (RRIF). A RRIF is an account registered with the federal government that gives you a steady income in retirement.
During your work years, you put money into your RRSP to accumulate savings for retirement. In retirement, you withdraw money from your RRIF as retirement income.
A minimum amount of annual withdrawals from a RRIF are mandated based on the market value of your RRIF, and your current age. (For 2020, the minimum amount is being reduced by 25% in deference to the financial hardship many Canadians are experiencing due to COVID-19.) RRIF withdrawals are treated like income for tax purposes, but taxes are not withheld at source—which means you may pay more or less tax that year, based on your total income the year of the withdrawal. Unfortunately, there is no mechanism to apply for less tax to be withheld. But, there are two options you could consider.
The first option is to convert your RRSP to a RRIF sooner than age 71, so you have to take out less (and pay less in taxes) each year; you can do this starting at age 55. The RRIF is a collection of investments similar to an RRSP that you draw down by the mandated amount and, depending on how long you live after retirement, could run out before you die (because you started withdrawals early). Since you likely have other sources of income, this may not be a problem for you.
The second option is to convert your RRSP into an annuity. An annuity is a form of insurance that guarantees a fixed sum of money is paid to you each year for life or, for a specified amount of time. Annuity payments from an RRSP will be taxed as income in the year you receive them.
Both these options require a metaphorical crystal ball for you to see your future—which can be difficult. Failing that, I would suggest seeking professional advice to put a financial plan in place. With the complexities of retirement planning, I would also suggest that seeking a few hours of a retirement or tax planner’s advice to plan for a tax-efficient way to make RRSP and RRIF withdrawals is money well spent.
Theresa Morley, CAP, CA, is a partner with Morley Chartered Accountants in Barrie, Ont. Check out her blog.
Compare the Best Savings Accounts in Canada
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Nvidia doubles revenue in one year, Canadian inflation moves in the wrong direction, Target misses badly, Walmart beats earnings...
Learn how to get mental health support in Canada, whether or not you have workplace benefits or insurance coverage.
Canadians with no children or siblings must consider estate planning alternatives. Here’s why trust companies can be a good...
The Trump effect and Trumponomics, Shopify’s huge earnings beat, it’s sunny days for Suncor shareholders and more.
You started investing in your 20s, and you feel pretty good about doing it. But now what? Consider impact...
Bitcoin surges, Coinbase makes a splash in Canadian football, and could bitcoin’s creator be Canadian?
The federal government’s capital gains inclusion rate increase has yet to become law. There’s a slight chance it may...
Canadians have reporting requirements for foreign assets, income and tax paid. Here’s how to claim each of these on...
Apple and Nvidia vie for global market cap crown; Google, Microsoft and Meta crush earnings; Amazon’s Bezos takes WaPo...
Just take $5,000 or less per withdrawal, and the withholding is 10%. Set up a quarterly withdrawal instead of a lump sum.
Correct me if I’m wrong please, but my understanding is that those tax percentages are what tax bracket you’ll likely be in at the end of the year, they(the government) does this so you don’t end up with a huge tax bill come tax time. Bottom line is the government will get the taxes you owe, depending on your total income, you may receive a refund or you may owe money on those RRSPs you withdrew depending on your tax bracket.
You don’t have to convert the entire RRSP to a RRIF. Until age 71, convert the amount you want to withdraw and also you will be able to take the $2,000 pension credit. There is no withholding tax on the RRIF for the minimum required withdrawal. After that, the usual w/h rates apply. If you convert only a small amount, the minimum required w/d will be small so most of the w/d will have the same rate applied as if from an RRSP. Therefore, convert all of it.
Would withdrawing multiple times a year an amount not exceeding $10,000 not a solution to reducing the taxes taken at source?
The writer didn’t answer the question that was asked. The answer is NO. Investment firms are required to follow certain rules. You can, as some have suggested, do your RRSP withdrawals in increments or $5,000. At that level your withholding tax would be 10%. That’s the best you can do. In that case your best bet is to arrange your finances in such a way that you withdraw from your RRSP at the end of the year so that you will receive the refund of those taxes only a couple of months after making the withdrawal. Another option, and in my opinion your better option, is to convert the RRSP to a RRIF. A RRIF has a required minimum withdrawal amount that can be withdrawn with no tax withheld. That minimum amount is determined by the by value of the account on Dec 31 of the previous year and your age. Any amount over the minimum is subject to the same tax rate as those given for RRSP withdrawals.
I had the same situation as David, except I’m not yet retired. Because I had friends who were very surprised of the tax withdrawing from their RRSPs after retirement, I thought I would start cashing out my RRSP that is in a 5 year tired GIC beforehand. I work part-time and I will be earning less money now then when I take my early retirement in a few years. However, living in Ontario, the with holding tax is 30%. Since I plan to reinvest this money, I thought it best to “bite the bullet” then put the money into a RRIF. Am I wrong?
I understand that CRA claws back the money for taxation , however upon doing taxes for the next year say your only income was that RSP withdrawal . Would you not be over paying tax and then in turn get a refund for approx. 70% of it ?
You could pull it out in smaller increments directly from the RRSP, but keep in mind that most institutions charge an admin fee for each RRSP withdrawal (usually around $50). Also, if you take your withdrawals too close together, they may catch what you’re trying to do and withhold at the higher rate.
It’s important to keep in mind that the reason withholding tax exists is to avoid a situation where not enough tax was taken at source, and you end up owing a ton of tax on your withdrawals at the end of the year. Also keep in mind that if the tax withheld ends up being too high, you’ll get a refund of the overage when you file your taxes. You’ll just miss out on the continued growth on that money if it had stayed in the RRSP.
Same here, I have contribution room in TFSA, I called the back to help me to transfer my stocks in RRSP to TFSA. I was shocked when bank wanted $2200 withholding tax and $25 fee on $8600 worth of shares. I know that’s sound like a small sum for some people, but I busted my brain to make that gain in the market. That’s all of my profit. See no justice!
In 2019, I withdrew 5000 from my RRSP and put it into TFSA as my income was very low. I was charged 10 percent tax and $50 by my investment firm. I then later in the year withdrew another 5000 and was charged 20 percent tax and another 50 by investment firm. I surveyed a large number of investment firm including banks, all charge 50 for basically pushing a key to deregister the money withdrawn. The charge for this needs to be more competitive. For example, a 10 fee would get me to move to another institution. Is there anything we can do to change this?? We as seniors shouldn’t be losing all this money on withdrawals.
There shouldn’t be more than 20% withholding tax on the withdrawal of RRSP for transactions in a 5-15K range, right? You’ve lost $480.
It is possible to use form T1213 to reduce DAS, this form is usually done with employer, I am wondering if there is any other form that can be used to do the same for RRSP withdrawal if tax deduction available that were not used.
T1213 generally used with employer when employee can prove that they have tax deduction that reduce their tax payable at year end.