Cashing In Before 71? When Early RRSP Withdrawals Make Sense

Hands Holding Retire Plan Matching Jigsaw Pieces

Topic: Tax Planning, Wealth Planning

Dianne C. White, CPA, CA, CFP, TEP

March 6, 2019

Image used with permission: iStock/AndreyPopov


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Cashing In Before 71? When Early RRSP Withdrawals Make Sense

Contributing money to an RRSP is synonymous with retirement planning in Canada. While you are in savings mode, the “RRSP contribution first” savings strategy works well as long as your marginal tax rate (pre-RRSP deduction) in your contribution years is the same or higher than the marginal tax rate you are expecting or projecting to pay in retirement.

The deadline to convert your RRSP to a RRIF is the end of the year you turn 71 and you make your first withdrawal in the year you turn 72. At that point, you withdraw the minimum amount required so you have a steady stream of “retirement income” for the rest of your days. However, there are circumstances where you could end up saving too much inside an RRSP and it is appropriate to make strategic withdrawals in the years before converting to a RRIF at age 71.

When do early withdrawals from your RRSP make sense?

The reality is that most folks retire before age 71. It is common to have a few years where you don’t have much in the way of taxable income compared to when you were working, so your average tax rate drops noticeably. This is an opportunity to use lower tax brackets to your advantage. Making early, strategic withdrawals from your RRSP makes sense in this situation because it can:

  •  Lower taxes that you pay in the long term
  • Spread out your RRSP/RRIF withdrawals over more years
  • It can provide a source of cash flow before you start collecting other forms of income like pension income or CPP and OAS

Making an early withdrawal from your RRSP doesn’t necessarily mean you need to spend the money. If you don’t need the cashflow, this can also be a way of shifting more savings into a non-registered account or TFSA. Having savings outside of RRSPs and RRIFs can come in handy, and be more tax efficient down the road, if you need to fund a larger, lumpy expense.

This strategy isn’t for everyone. So it is important to understand how different sources of income you receive are being taxed. In particular, be mindful that the 2019 OAS clawback starts if your annual net income is in excess of $77,580. You don’t want to inadvertently claw OAS back if you don’t need the cashflow from an RRSP withdrawal!

What are you giving up if you make early withdrawals?

  • The loss of tax-sheltered compounding of investment income
  • RRSP withdrawals are taxable and subject to specific withholding tax rates, depending on how much you withdraw within the year, as follows:
    • Up to $5,000, the tax withheld is 10%
    • Between $5,000 – $15,000, the tax withheld is 20%
    • Over $15,000, the tax withheld is 30%

Remember tax withheld at source is not necessarily the amount of tax that is actually payable on your income earned. Withholding tax is a prepayment of tax only. Therefore, cashlfow planning around RRSP withdrawals is important, especially if you owe more than the tax withheld at source on the withdrawal. Make sure you have the funds to cover the balance.

The last thing to note is that you can convert your RRSP to a RRIF before age 71. If you do this and only withdraw the minimum amount required, then there is no withholding tax at all. Again, this doesn’t mean that you don’t owe tax, but rather you could use other funds to pay the tax rather than from the RRIF. Be sure you are not likely to return to work or have any other type of significant income like a large capital gain before converting your RRSP to a RRIF before age 71. Once you RRIF you cannot “un-RRIF” and taxable income will be generated each year by the minimum required withdrawal. Keeping your RRSP as an RRSP provides flexibility to manage withdrawals when you having other income sources that are variable.

Waiting until age 71 to access funds saved in an RRSP or making early withdrawals will depend on your own specific financial circumstances. The best way to determine an appropriate course of action is to prepare a retirement plan. At Nexus, we work with our clients to determine the best way to access RRSPs and prepare a retirement plan that maximizes cashlfow and minimizes income tax.

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