In general, receiving money during your working years is pretty simple for many. Your employer sends you a paycheque at a set schedule based on a yearly salary or the number of hours you’ve worked during your pay period. In retirement, you need to combine many different sources of income together to make up your retirement paycheque. One of those retirement income sources is an RRSP or Defined Contribution Pension Plan. Depending on the plan, the withdrawal rules might be different.

Registered Retirement Savings Plan (RRSP)

Withdrawing from an RRSP

The mechanics of withdrawing money from an RRSP is quite simple. You can request to withdraw money at any time from your RRSP, with no restrictions on the amount. However, while it may be simple to process the actual withdrawal, you need to consider the impact of tax. Withdrawals from an RRSP are taxed fully as income. If you withdraw $10,000 from your RRSP, that $10,000 will be added to your taxable income for the year. This shouldn’t be much of a problem if you’re retired and relying on investments and pensions for your income. However, if you’re still working and earning a decent salary, the RRSP withdrawal will be added to your salary and may bump you into a higher tax bracket. Retirees also need to consider the total amount they are pulling from the RRSP each year compared to their other sources of taxable income.

Since RRSP withdrawals are taxed as income, the government wants a portion of that tax right away, like how tax is deducted from your paycheque. This initial tax is called a withholding tax. The amount withheld depends on the amount withdrawn and is shown in the table below.

Withdrawal Withholding Tax
Up to $5,000 10% (20% in Quebec)
Over $5,000 to $15,000 20% (25% in Quebec)
Over $15,000 30% (also 30% in Quebec)

 

Tax will be withheld immediately based on these rates, but ultimately the withdrawal will be taxed at your marginal rate. Here’s an example to see how this plays out.

Salary $175,000
Tax Bracket (in Ontario) 47.97%
RRSP Withdrawal $10,000
Withholding Tax 20%

 

In this example, your salary is $175,000 putting you in the 47.97% tax bracket in Ontario. An emergency comes up, so you withdraw $10,000 from your RRSP. Of that $10,000 withdrawal, $2,000 will be remitted to the government, and you’ll receive $8,000 in your bank account. Come tax time, you need to add $10,000 to your $175,000 income, to get $185,000 in total. Your marginal tax rate is 47.97% so you’ll owe $4,797 tax on the RRSP withdrawal (on top of the tax you pay on your $175,000 salary). You’ve already paid $2,000 tax through the withholding tax, so you owe an extra $2,797 in tax at the end of the year as a result of the RRSP withdrawal.

If you’re in retirement and your income was $20,000 from CPP and OAS and you withdraw an extra $10,000, you’ll be in the lowest tax bracket of 20.05%. Ignoring any credits and deductions, you’ll owe $5 come tax time ($2,005 tax less $2,000 withholding tax paid), since your marginal rate is essentially the same as the withholding tax.

Registered Retirement Savings Plans (RRSPs) cannot be open beyond age 71

RRSP’s are can only be open until the end of December in the year you turn 71. At that point, you have 3 options:

  1. Withdraw the total value of your RRSP that year. That means the entire value of the RRSP will be included in your income for the year for tax purposes. Unless your RRSP is very small, this option doesn’t make sense from a tax perspective.
  2. Purchase an annuity with the money in the RRSP. Annuities will take a lump sum of money up front and promise to pay you a certain amount every year for the rest of your life (like a Defined Benefit Pension Plan). These aren’t very popular in Canada for a variety of reasons.
  3. Convert your RRSP to a RRIF (Registered Retirement Income Fund). A RRIF is like a RRSP, however you are no longer allowed to make contributions towards a RRIF. RRIFs also differ from RRSPs by requiring a certain percentage of the account to be withdrawn each year. This percentage changes based on your age and uses the previous year-end market value to calculate the withdrawal. For example, Adam is 72 and will have to withdraw 5.40% of his RRIF account (based on the government minimum withdrawal schedule). Assuming the RRIF was worth $500,000 at the end of the previous year, that would mean $27,000 would have to be withdrawn and included in Adam’s income that year. Minimum RRIF withdrawals don’t automatically have tax withheld like RRSP withdrawals, so Adam will need to personally set aside money to pay the taxes on this income come April. Amounts withdrawn above this minimum payment will have tax withheld by the financial institution.

Defined Contribution Pension Plans

When you leave your employer (because of retirement or changing jobs), you’ll most likely have to transfer your Defined Contribution Pension Plan into something called a LIRA (Locked-In Retirement Account) or LRSP (Locked-in Retirement Savings Plan). Each locked-in account has a jurisdiction associated with it. This jurisdiction can be federal or provincial (except PEI) and is decided by the employer who sets up the plan. Each jurisdiction has its own rules for the plan. LIRAs and LRSPs can be invested just like an RRSP, but you cannot make any contributions into these accounts (aside from transfers from pension plans) and there are restrictions on withdrawals.

Withdrawing from a LIRA or LRSP

In general, Canadians cannot withdraw money from a LIRA or LRSP, unless you are experiencing financial hardship, have a reduced life expectancy, or the account value is under a certain dollar value. These withdrawal rules are dependent upon the jurisdiction of the locked-in account. When you want to start pulling money out of a LIRA or LRSP for retirement purposes, you will need to convert it to a Locked-in Retirement Income Fund (LRIF), Restricted Life Income Fund (RLIF) or Life Income Fund (LIF) or Prescribed RRIF, depending on the jurisdiction. Some jurisdictions have minimum age requirements before you can convert your LIRA or LRSP. For example, in Ontario, you generally must wait until age 55 before you can convert the account to a LIF and start withdrawals. You may also be allowed a one-time opportunity to unlock a percentage of the funds upon conversion. In Ontario, you can withdraw up to 50% of the fund upon conversion to a LIF, which can be transferred over to a RRSP or RRIF account with no tax consequences.

LIF’s and Locked-In Retirement Income Funds have the same minimum withdrawal requirements as a RRIF account. However, many jurisdictions also have maximum withdrawals so the pension account will provide lifetime income and you do not deplete the account early through large withdrawals. For Ontario, they aim to provide income until at least age 90. Coming back to our example of 72-year-old Adam, assuming his account was a LIF instead of a RRIF, his maximum withdrawal in 2019 would be 8.4548%. This means that Adam must withdraw $27,000 from his LIF but could withdraw up to $42,274. Your financial institution should calculate the minimum and maximum withdrawal amounts at the beginning of each year based on the jurisdiction and the relevant rules.

RRSP and Defined Contribution pension plans will likely form only a portion of your retirement income. While I’ve outlined the rules set by the government above, the amount of income you can sustainably withdraw from these accounts and others will depend on a host of factors.