Can I cash out my RRSP early? What you need to know
For much of the average working Canadian’s life, a registered retirement savings plan (RRSP) is a one way street, with money going in but almost never being withdrawn. Certain circumstances, however, can leave one wondering “can I cash out my RRSP early?”
Keep reading to understand the rules surrounding RRSP early withdrawal along with how Alpine Credits provides a cheaper alternative.
Can I cash out my RRSP early?
According to the Canada Revenue Agency (CRA), you can withdraw funds from an RRSP anytime as long as your plan is not locked in with a particular financial institution.
If you’re not sure whether your RRSP is locked in, you can typically find out with a quick phone call to the bank or brokerage that holds your funds. Ask them whether your account is a traditional RRSP or a locked in retirement account (LIRA).
It’s worth noting that even some LIRAs allow early withdrawals in exceptional circumstances. For example, you may be able to withdraw funds if you’re facing:
- Imminent foreclosure or eviction
- High disability-related costs
- Drastically reduced life expectancy (i.e. due to a terminal illness)
Most Canadian provinces have their own rules for how you should go about unlocking retirement funds in these situations.
Making an early RRSP withdrawal isn’t something to take lightly, however. There are several ramifications you should be aware of. Let’s explore those next.
What is the penalty for cashing in an RRSP Early?
The moment you cash out an RRSP, those funds become subject to a withholding tax at the following rates, as set by the CRA.
|Withdrawal Amount||Tax Rate|
|$0 – $5,000||10% (5% in Quebec)|
|$5,001 – $15,000||20% (10% in Quebec)|
|$15,000 and above||30% (15% in Quebec)|
If you live in Quebec, an additional provincial tax will be levied based on rates set by Revenue Québec.
You’re not necessarily done paying for withdrawals after the withholding tax, mind you. If the withholding tax rate is lower than your marginal tax rate, you’ll end up having to pay more when you file in the spring.
It’s worth pointing out, however, that this is not an RRSP early withdrawal penalty, per se. Even in retirement, withdrawing your funds as a lump sum will incur withholding tax at these rates. It’s only fair, considering that the government allows you to deduct RRSP contributions from your taxable income.
RRSP early withdrawal penalties do exist, however – and they can impact your bottom line in ways that go far beyond a one-time tax.
Other downsides of withdrawing your RRSP early
Loss of tax-sheltered compound growth
One of an RRSP’s biggest benefits is that you don’t have to pay capital gains tax every year. As such, money that would otherwise be taxed is instead left to grow inside your account for as long as it stays open. This can deliver tremendous results thanks to the power of compound interest.
When you withdraw from an RRSP early, you’re stopping this power in its tracks, which can have devastating implications for your net worth. Even a $5,000 withdrawal from a portfolio earning 9% yearly (which is what the stock market returns, on average) robs you of more than $28,000 over the course of 20 years.
Permanent contribution room loss
“No problem,” you might be thinking after reading that last paragraph. “I only need the money for a short while anyway. I’ll re-deposit it in a month or two.”
That won’t work, though, because withdrawing from an RRSP early also permanently erases the related contribution room.
In other words, if your RRSP is currently maxed out and you withdraw $5,000, you don’t suddenly have $5,000 of contribution room. You’re still maxed out, which means your RRSP will forever be missing that $5,000 and whatever amount it would have produced in gains.
To be clear, this loss of contribution room also happens if you withdraw funds in retirement. At that point, however, you won’t have 40+ years of compound growth to worry about missing out on. Permanent loss of contribution room is most damaging when it occurs earlier in life.
Potential market losses
If you’re withdrawing from an RRSP early to cover emergency expenses, you probably don’t have the luxury of timing things. This might mean selling the investments inside your RRSP when the market is down substantially.
To make matters worse, you can’t claim capital losses inside an RRSP. As a result, you end up eating those losses, which you almost certainly would have recouped by staying invested for the intended duration of your RRSP.
Penalty-free options for RRSP early withdrawal
To put it simply, withdrawing from an RRSP early can have devastating impacts on your finances. However, the Canadian government does recognize that there are non-emergency scenarios in which one might legitimately benefit from having access to RRSP funds.
As such, there are two programs offering this access. Let’s take a look at them now.
Home buyers’ plan
The Home Buyers’ Plan allows you to borrow from your own RRSP to buy or build your first home. There is no withholding tax whatsoever. Additionally, you won’t lose any contribution room and must replace the funds within 15 years.
The downside is that the Home Buyers’ Plan has a fairly low withdrawal limit of $25,000. Even the proposed increase to $35,000 won’t go very far if you’re buying a home in one of Canada’s real estate hotspots like Toronto or Vancouver.
Lifelong learning plan
Through the Lifelong Learning Plan, you can withdraw up to $10,000 per year for schooling. There is a lifetime limit of $20,000 but you can reset this after replacing the funds within a 10-year period.
Alpine Credits: The ultimate alternative to withdrawing rour RRSP early
|Consideration||Alpine Credits||Early RRSP Withdrawal|
|Taxes||None; simply pay a low interest rate on the amount you borrow||Up to 30% (potentially more, depending on your circumstances)|
|Loss of investment growth||None; the equity in your home continues growing since you’re not selling anything!||Your investment growth stops in its tracks the moment you withdraw|
|Potential for market losses||As long as you pay your loan off on time, you won’t incur losses||When cashing out of an RRSP early, you’re locking in any losses within the account|
As you can see, withdrawing from an RRSP early has many downsides. Thankfully, Alpine Credits offers homeowners a much more preferable solution in the form of home equity loans.
With a home equity loan, you can simply access the equity you’ve built up in your residence for just about any purpose imaginable. The equity’s value keeps growing as well because you’re not actually selling it but, rather, using it as collateral.
Interest rates on home equity loans are also very reasonable, making them among the most affordable forms of financing available. Check out this page to learn more about how home equity loans compare to other types of borrowing.
Frequently asked questions
Unless you’re withdrawing funds through the Home Buyers’ Plan or Lifelong Learning Plan, you will pay a withholding tax. In other words, no, you can’t get around paying taxes when you make an early RRSP withdrawal.
This depends on your financial institution. Once you’ve submitted the necessary paperwork to withdraw funds, you’ll be subject to their timeline for receiving funds.
You absolutely can – unless your RRSP is what’s known as a locked in retirement account (LIRA), in which case you’ll need to follow your financial institution’s rules for early withdrawals. At the government level, however, there is nothing technically stopping you from cashing out an RRSP early.
This isn’t advisable if you have other options. When cashing out an RRSP, you lose that contribution room for good, meaning you’ll be suffering the consequences long after your debt has been repaid.
If you own your home, consult an advisor at Alpine Credits for a better solution.