Test your knowledge about RRSPs – part 3
What you need to know about RRSP withdrawals
So far we’ve covered opening an RRSP and the ins-and-outs of RRSP contributions.
Now, let’s turn our attention to RRSP withdrawals. Did you know….
1. If you make a withdrawal from an RRSP, you don’t receive the full amount.
This is because a withholding tax is deducted from your withdrawal amount.
The withholding tax rate that is applied depends on the amount requested to be withdrawn and which province you reside in.
2. Withdrawals are taxed as income.
A T4RSP will be issued in the amount of the withdrawal requested and must be included on your tax return for that tax year.
3. If the withdrawal is from a spousal plan, the contributor may have to declare it as income.
Normally, with a spousal plan the money in the RRSP is taxed to the spouse when it is withdrawn.
However, if a contribution to any spousal plan is made in the year of withdrawal, or in the two previous years, the contributor must include in their income the lesser of the amount withdrawn, or whatever they contributed for those years.
4. You can borrow from your RRSP to buy a home – and not pay tax on the withdrawal.**
Coming up with the down payment needed to buy a first home can be a challenge. But with the Home Buyers’ Plan (HBP), as a Canadian resident, you can withdraw up to $35,000 from your RRSP (or $70,000 per couple) to help buy or build your first home.
You have 15 years to pay back the amount you withdrew, and must start paying it back in the second year after you buy your home. The minimum payment each year is calculated by the CRA as the balance owing divided by the years remaining in the 15-year repayment schedule. You can pay more than the minimum amount, which can be helpful because you could pay back larger amounts if your income increases.
Keep in mind that you can use this program only once.
** If a taxpayer buys the qualifying home with a spouse or common-law partner, or with other individuals, each of the buyers can withdraw up to $35,000, if eligible.
5. You can use your RRSP to pay for your education – and not pay tax on the withdrawal.
With the Lifelong Learning Plan (LLP), you can borrow up to $10,000 a year from your RRSP – to a maximum of $20,000 over four years – to help cover full-time education costs. The school you’re attending also has to qualify under the program. You can use this program to fund your education or your spouse’s, but not your children’s.
You’ll need to start paying back the money you borrowed from your RRSP by the fifth year after making your first withdrawal or in the second year after you stop going to school full-time, whichever comes first.
You must pay back at least 10% of what you borrowed in the first year that you make repayments, and you have up to 10 years to pay back the entire amount.
Unlike the HBP, you can use the LLP multiple times until you turn 71, as long as you’ve paid back any amounts you’ve already withdrawn under the program.
6. But, if you miss either an HBP or an LLP payment, you will be taxed.
The proportionate annual repayment amount will be added to your income. Any amount below the annual minimum payment amount will be added to your taxable income for that year.
7. RRSP withdrawals can impact OAS.
Old Age Security (OAS) is reduced or clawed back when net income exceeds certain thresholds. Contact your financial advisor if this applies to you.
8. When you die, the value of your RRSP is included in your income.
The market value of all the investments held in an RRSP at the time of the annuitant’s death is generally included in the income of the deceased for the year of death.
9. Any increase in the value is taxed to the beneficiaries.
A subsequent increase in the value of the RRSP investments after the annuitant’s death is generally included in the income of the beneficiaries of the RRSP upon distribution.
10. Except if the spouse or common-law partner is the sole beneficiary of the RRSP.
If the following two conditions are met, the deceased annuitant is not considered to have received the Fair Market Valuation (FMV) of the RRSP at the time of death:
The spouse or common-law partner is named in the RRSP contract as the sole beneficiary of the RRSP; and
By December 31 of the year following the year of death, all the RRSP property is directly transferred to an RRSP or a RRIF under which the spouse or common-law partner is the annuitant (or to an issuer to buy an eligible annuity for the spouse or common law partner)