If you are like many Canadian retirement savers, a large portion of your retirement savings is held in RRSP's (Registered Retirement Savings Plans). You may be wondering, under what circumstances does it make sense to withdraw from my RRSP's even before I retire?
On today's episode, we discuss several situation where it makes sense to withdraw funds from your RRSP, even if you're not yet retired:
1) Buying A Home Using the Home Buyers Plan
Under the 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 withdrawal comes out tax free, and it needs to be repaid to your RRSP over 15 years. If you don't make a repayment, the prorated amount is added back to your income for that year. If you're finding it difficult to come up with a down payment for your first home with cash, and you've been successfully saving in your RRSP, this is a very tax-efficient way to come up with the money for a down payment.
2) Going Back to School
If you’d like to develop new job skills or even change careers completely, you can take advantage of the Lifelong Learning Plan (LLP), which allows you to withdraw funds from your RRSP to fund tuition and other education costs. Under the plan, you can withdraw up to a cumulative total of $20,000 from your RRSP—up to $10,000 in a calendar year. This is similar to the Home Buyers Plan in that the withdrawal comes out tax-free, and needs to be repaid over time (a period of 10 years in the case of the home buyers plan).
3) Taking a Year off Work
RRSP withdrawals are taxed as income in the year that they are made. If you are taking a short term sabbatical from your high-paying job, you may find yourself in a lower tax bracket temporarily. This may be a good opportunity to make an RRSP withdrawal at your (temporarily) low marginal tax rate. If you have TFSA room available, even if you don't need the RRSP funds now for a purchase, you can consider shifting money from you taxable RRSP bucket to a tax-fee TFSA bucket for long-term tax savings.
4) Managing your Tax Brackets as a Retiree
As you enter retirement, it may make sense to strategically withdraw money from your RRSP in order to smooth out and "average down" your income taxes throughout retirement. There are several different situations where not taking enough income from your taxable investments can hurt you later on in retirement.
First, once you begin taking OAS (Old Age Security), if you are making over $79,845 in 2021 you get your benefits "clawed back" at a rate of $0.15 for every dollar of income that you make over that amount. Making taxable withdrawals early in retirement can help you avoid this claw back.
CPP, Pension Withdrawals, and RRIF minimums bumping you into a higher bracket
CPP, pension, and RRIF minimum payments are fully taxable as income in retirement. Taking RRSP withdrawals in those early years of retirement can help you "push down" those future minimum payments to keep your taxable income lower as your retirement progresses.
Even if you don't need the funds immediately, you can still use these withdrawals to your advantage through contributing to a Tax Free Savings account, making a larger donation to charity, or investing in a non-registered account and having future growth being taxed at more favorable dividend and capital gains treatment.
Have a Plan
All of these strategies are highly dependent on your unique situation. Generally, the best "bang for your buck" with RRSP's is to invest while you are in a high tax bracket, take advantage of the tax-free compounding for several (many) years, and then withdraw the funds when you are in a lower tax bracket and/or can split that income with a spouse. A strategy to make early withdrawals should be taken with caution. An approach that works for one person may not work for the next person.
I recommend sitting with a financial planner who can help you determine the best mix of strategies that will work for you.