When should I withdraw from my RRSP?

A withdrawal from your RRSP will count as taxable income for the year it is withdrawn, except under two circumstances - the Home Buyers' Plan or the Lifelong Learning Plan. It will also be subject to a withholding tax which gets taken out of your withdrawal immediately and paid to the government to cover a portion of the taxes you'd normally owe. Come around tax season, if the withholding tax was greater than what you owed in taxes, you'll get a tax refund. If the withholding tax was less than what you owed in taxes, you'll have to pay additional taxes.

Withholding Tax rates

A simplified example:

John, from Ontario, makes $75,000 this year and withdraws $10,000 out of his RRSP for emergency reasons. Assuming his marginal tax bracket is 35%, he will owe an additional $3,500 of income taxes come tax season. Due to a withholding tax of 20% ($2000 of “pre-paid” taxes in a way), John will only receive $8,000 in his bank account when he makes the withdrawal. Then come tax season he will owe an additional $1,500 in taxes.

You should withdraw from your RRSP only if:

• Using a Home Buyer's Plan
• Using a Lifelong Learning Plan
• You're in retirement and need the funds for your lifestyle
• Pro tip: If you don't need the funds, you can postpone withdrawing from your RRSP until the age of 71 years once it's been converted to a RRIF.
• You're in a situation where you need additional income to sustain your lifestyle and your marginal tax bracket is low (Maternity leave, paternity leave, sabbatical year, etc)
• You need extra income in case of an emergency, but only if you're willing to pay the taxes associated with the withdrawal. Avoid this unless absolutely necessary!