Many Canadians are surprised when they withdraw money from their RRSP (Registered Retirement Savings Plan) and discover that the actual amount they receive is much lower than expected. For example, you might withdraw $10,000 but only see $8,000 deposited into your account.
This difference is caused by withholding tax, which is automatically deducted by financial institutions when you take money out of your RRSP. Understanding how withholding tax works — and how to plan your withdrawals — can help you maximize the amount you actually receive.
1. How RRSP Withholding Tax Works
When you withdraw from an RRSP, the bank or financial institution deducts withholding tax right away. The rate depends on the amount of your withdrawal:
| Withdrawal Amount (CAD) | Withholding Tax Rate (most provinces) |
|---|---|
| $5,000 or less | 10% |
| $5,001 – $15,000 | 20% |
| Over $15,000 | 30% |
- Québec residents: lower provincial rates apply (5%, 10%, 15%).
- Non-residents: typically 25%, unless a tax treaty provides a lower rate.
⚠️ Note: Withholding tax is not your final tax. At the end of the tax year, you must include RRSP withdrawals as income on your tax return. If the actual tax owing is lower, you get a refund; if higher, you may need to pay additional tax.
2. Lump Sum Withdrawals vs. Multiple Withdrawals
- Lump Sum Example:
Withdrawing $20,000 in one transaction triggers the 30% rate. You’ll lose $6,000 upfront, receiving only $14,000. - Multiple Withdrawals Example:
Splitting that $20,000 into four separate $5,000 withdrawals means each is taxed at 10%. Total withholding is $2,000, so you receive $18,000 in hand.
Result: Multiple smaller withdrawals reduce the immediate withholding tax, putting more cash in your pocket right away.
3. Why Multiple Withdrawals Can Be Smarter
- More cash on hand: Smaller withdrawals mean less tax withheld upfront.
- Flexibility in tax planning: You can align withdrawals with lower-income years.
- Avoid higher brackets: Keeping withdrawals within the 10% tier can reduce immediate deductions.
4. Important Considerations
- Withholding ≠ Final Tax
Even if you reduce upfront deductions, your final tax liability depends on your total annual income. - Non-residents are different
If you’re a non-resident, withholding is usually fixed at 25%, regardless of withdrawal size. - Seek professional advice
If you’re planning large withdrawals or have cross-border income, talk to a tax advisor.
5. Key Takeaways
- RRSP withdrawals are subject to withholding tax: 10%, 20%, or 30%, depending on the withdrawal amount.
- Splitting withdrawals into smaller amounts can help you reduce immediate tax withheld.
- Ultimately, your total income determines your real tax burden, and withholding is just an advance payment.
By understanding the rules and planning your RRSP withdrawals strategically, you can keep more money in your pocket today — while staying compliant with Canadian tax regulations.
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