Has your financial situation changed and you’re considering withdrawing funds from your RRSP to cover expenses or debts? Before you do so, it’s important to understand the implications of this move and consider the other options available to you. Here’s a 5-question overview.
Can I withdraw money from my RRSPs to pay my debts or expenses?
Yes, it’s possible, but it should never be your first option,” Vanessa Houghton, a senior advisor at National Bank, immediately admits. “Withdrawing from your RRSPs before retirement has several tax consequences that you need to understand.” Here are five:
Early disbursement results in withholdings
No matter how much money you have saved in your RRSP for your retirement, you won’t be able to use it all to pay your expenses or debts. In Quebec, at the time of disbursement, your financial institution will withhold taxes (federal and provincial) between 19 and 29%*.
- For a withdrawal of less than $5,000, the withholding tax is 19%. Withdrawing $5,000 would leave you with $4,050 left to pay off your debts after the $950 withholding tax.
- For a withdrawal between $5,001 and $15,000, the withholding tax is 24%. For a withdrawal of $15,000, the withholding tax will be $3,600. This means $11,400 will be deposited into your account.
- For a withdrawal of more than $15,000, the withholding rate is 29%. For a withdrawal of $16,000, $4,640 will be deducted, giving you $11,360.
Outside Quebec, the deductions are as follows
- 10% for withdrawals of $5,000 or less
- 20% for withdrawals between $5,000 and $15,000
- 30% for withdrawals over $15,000
The amounts withdrawn are added to your taxable income
“If your total taxable income is near the top of a tax bracket, the amounts withdrawn from your RRSP could push you into a higher tax rate,” adds the expert.
For example, in 2025, a person in Quebec who earned $35,000 per year and withdrew $10,000 from their RRSPs moved into the second taxable income bracket, which ranged from $43,790 to $87,575. This person was therefore taxed at 20% instead of 15%. Tax brackets differ between Quebec and the rest of Canada, so it’s important to be well informed. They can also change from year to year.
You lose these contribution rights
When you withdraw money from your RRSPs, the contribution room you had is not renewable. Once your financial health is restored, you will therefore not be able to put the withdrawn amounts back into your RRSP. A ceiling and a maximum percentage of your salary are set each year for your RRSP contributions.
You are reducing your retirement fund
RRSPs are an investment for retirement. For those who contribute to a pension plan, RRSPs will be a source of supplemental income. For others, such as the self-employed, they will often be the only source of income in retirement, with the exception of government plans. Regardless of your situation, depriving yourself of these savings could jeopardize your comfort in retirement, at an age when unexpected expenses related to your health, for example, may be necessary.
You are missing out on performance opportunities
By withdrawing your RRSPs before retirement, you also miss out on the opportunity to grow your money over the long term through compound interest. For example, $7,000 invested in an RRSP for 30 years, with an annual rate of return of 5%, will result in gains of $24,274, for a total of $31,274.
Should I withdraw money from my TFSA instead?
Yes, it’s better to withdraw from your TFSA than from your RRSP. The amounts withdrawn are not taxable, and you’ll get your contribution room back the following year. But again, withdrawing from your TFSA should be a last resort. The TFSA shouldn’t be considered a savings account or an emergency fund. It’s a tool for saving money that will supplement your income during your retirement.
What other options are there for paying my expenses or debts?
Before withdrawing from your RRSP or TFSA, you should meet with your advisor to review the other options available to you based on your situation. They will also be able to offer you tools and advice to help you pay off your debts , better manage your finances and regain better financial health.
When is it a good idea to withdraw from my RRSPs?
There are two scenarios where it may be worthwhile to withdraw your RRSPs before retirement age. “The first is when you want to buy your first property. You can use the Home Buyers’ Plan (HBP), which allows you to withdraw up to $60,000, which will become your down payment. You will have a maximum of 15 years to repay this amount, starting the second year following the withdrawal. If you want to go back to school, using your RRSPs is also possible. “With the Lifelong Learning Plan (LLP) , you can withdraw your RRSPs to pay for your tuition fees and any other costs related to your return to school.” This program allows a maximum withdrawal of $10,000 per year, for a total amount that cannot exceed $20,000. You will have 10 years to repay the amounts withdrawn.
How do I withdraw from my RRSP?
Finally, if you are required to withdraw from your RRSPs, simply request it from your advisor, who will complete a form and have it signed. They will ensure that you are fully aware of all the tax implications of your withdrawal. The amount withdrawn, less withholding taxes, will be deposited into your account.
