Pros and Cons: Withdrawals from RRSP or RRIF
I often get questions about “how to begin payments from an RRSP?” or “when to start a RRIF”? What follows is a high level overview when contemplating withdrawals for either type of plan.
RRSP = Registered Retirement Savings Plan (sometimes just called RSP for short)
RRIF = Registered Retirement Income Fund (sometimes just called RIF for short)
Firstly, withdrawals from RRSPs or RRIFs are taxed as ordinary income. Each year you will receive a tax slip from the financial institution showing the total withdrawals made during the calendar year.
Remember that when you contributed to your RRSP, you received a corresponding tax deduction, which reduced your taxes owning at that time. Assuming you were in a higher tax bracket then than now, you pay less tax overall and just as important, you “deferred taxes” on the earned income since the contribution…perhaps 30 to 40 years.
So When Do You Start Withdrawals from an RRSP?
You can withdraw all or any amount from an RRSP as you require but as mentioned before it’s taxed as income. and will be subject to withholding tax, meaning the government requires a portion of the tax prepaid, and you get the balance. See the chart below for the percentage withheld based upon the amount withdrawn.
So for a $10,000 withdrawal, withholding tax would be 20% or $2,000 and you receive the difference i.e.$8,000. When you receive the tax slip it shows both the withdrawal and the withholding tax paid.
Therefore for lumps sum withdrawals, you might want to withdraw from your RRSP but if you want regular payments (monthly, for example) then consider converting the RRSP to a RRIF. For more information, click here for more information.
There are many strategies around RRSPs and RRIFs and how to optimize the withdrawals but they depend upon your personal situation and are beyond this scope of this introductory article.Not sure where to start? Enter your name and email in the box on the right to complete the Goal Planning Checklist. Instantly identify the strengths and weaknesses in your current financial plan.
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