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RRSP or TFSA Withdrawals Before Retirement: Here’s what you need to know

/ Investments / Jan 16, 2021

You have had an RRSP or a TFSA in place for quite some time. Now that you have watched your money grow in any one (or both) of these plans, you may want (or need) to use it. There are quite a few ways to use your RRSP or TFSA savings before your retirement. Here’s what you must know.

Withdrawing from RRSP (Registered Retirement Savings Plan)

If you are making a withdrawal from your RRSP, note that this room of contribution is lost forever. You will even have to pay income tax at the time of withdrawal. You may even have to pay more taxes at that point in time because your annual income would likely be more than when you are retired.

Early RRSP withdrawals are typically not recommended because you will be losing the opportunity to save your money on a tax-deferred basis. RRSP is primarily used to save for retirement – however, there are some exceptions:

1) The HBP, also known as the Home Buyers’ Plan

  • If you are purchasing a home for the first time, you can use the HBP to withdraw up to $25,000 from your RRSP tax-free and put the amount towards the purchase of your home.
  • First time home purchaser refers to the fact in a 4-year period, you had not lived in a home that you or your partner had owned.
  • Note, you may also be considered a first-time home purchaser in the future once the 4-year period is gone.

Any amount that has been withdrawn under the Home Buyers’ Plan must be repaid back to the RRSP. You typically have up to 15 years to pay back the entire HBP amount to the RRSP. The payment starts from the second year after you withdrew the money. The entire amount can be repaid at any time.

2) LLP or Lifelong Learning Plan

  • Lifelong Learning Plan allows you to get a loan free of interest from your RRSP to finance education or full-time training for you or your partner.
  • You are allowed to withdraw up to $10,000 a year, to an all-time total of $20,000.
  • In case you withdraw more than the annual or the all-time total LLP limit, the extra amount will be included in your income for the calendar year you go over the LLP limit.

You have around 10 years to repay the withdrawal amount. The full amount can be repaid at any time.

Withdrawing from the TFSA

If you are planning to withdraw from the TFSA, there is no responsibility to repay the amount back. For this reason alone, it is generally recommended to withdraw from the TFSA rather than the RRSP.

You can use the funds withdrawn towards an HBP or an LLP, or towards a vacation, emergency fund, or a costly purchase.

Also, if you want to repay the amount back to the TFSA, you must wait till the next calendar year. For example, if you making a withdrawal in Feb 2021, you must wait till Jan 2022 to repay the amount. If you repay too soon, you will have to cough up a 1% tax penalty on the excess TFSA amount/month, for every month of excess contributions.

To sum up, we would say that the TFSA can be used for anything you want. But remember, if you are using it for a short-term investment, you are losing out on the potential for tax-deferred growth of money. That could have made a significant difference at the time of your retirement.

RRSP or TFSA withdrawals may look too complicated in hindsight – get in touch with a financial advisor who can provide you with the best possible option on what to do.

This tax season, start an RRSP or TFSA (if you haven’t done already). Small contributions a month can grow humungous at the time of your retirement. Contact our financial advisors in Toronto, Mississauga, Brampton, Ajax, Pickering, Oshawa, Markham, Vaughan, Milton, Oakville, Burlington & Hamilton for more information.