Cash Out Your RRSP And Pay Down Debt?

by Tax Guy - Burlington Accountant on February 11, 2011 Print This Post Print This Post

Have you considered withdrawing from your RRSP or other retirement savings plans to pay down your debts? Have you thought of using your RRSP to take a vacation or as a ready source of cash?

Withdrawing from your RRSP early can have some unintended tax consequences. There may be alternatives to using your regular or self-directed RRSP for debt reduction or other ways to access cash you may need.

RRSP Withdrawals & Income Taxes

The financial institution that holds your RRSP is required under to withhold a portion of the withdrawal for income tax. The RRSP withholding taxes are as follows:

RRSP Withholding Taxes

RRSP WithdrawalWithholding Tax
up to $5,00010%
$5,001 to $15,00020%
$15,001 and up30%

In Quebec, the withholding rate is ½ of the percentages in this table.

For example, if you have $20,000 of debt, you would need to withdraw at least $28,600 from your RRSP ($28,600 – 30% = $20,020).

Although, you may be thinking that you could reduce the amount of withholding tax to 10% by doing four $5,000 withdrawals, you may be doing yourself more harm than good.

The withdrawals from your RRSP are added to your taxable income and the withholding tax may not be enough to offset the extra tax that is actually due on the withdrawal. You could be hit with a tax bill at the end of the year!

Also note that some financial institutions are looking at clients who have made multiple RRSP withdrawals and may require the higher withholding rate be applied!

An Example

Jim earns $40,000 and needs $20,000 to pay off his debt.

If Jim does a lump sum withdrawal of $28,600 he will receive $20,000 to pay off his debt.

At the end of the year, Jim’s employer would have remitted $6,400 of tax for his employment income and the bank would have withheld $8,600 for his withdrawal.

His taxable income would be $68,600 and would still owe $360 to the government as a result of the withdrawal.

On the other hand, if Jim decided to do four withdrawals of $5,600 each, the total tax withheld would only be $2,200. At the end of the year Jim would owe the government an additional $5,300!

Are There Alternatives To Withdrawing From Your RRSP?

I am of the opinion that an RRSP you should never withdraw from your RRSP to pay down personal debt! Think about the following alternatives to withdrawing from your RRSP:

  1. RRSPs & RRIFs are Creditor Protected. If you find yourself unable to pay your creditors, you may be facing bankruptcy. Know that if you go into bankruptcy, RRSP contributions made more than 2 years prior to bankruptcy cannot be touched by your creditors.
  2. Consolidation Loans. If you still have good credit and are finding that your debt payments are getting out of control, consider consolidating your debts into a single payment. The single payment should be lower than your combined payments and the term of the loan is fixed (so there is an end in sight). If you consolidate, take steps to eliminate your credit cards and other lines of credit so you don’t find yourself in this situation again.
  3. Consumer Proposal To Creditors. If you are unable to get a consolidation loan, you should consider seeking the help of a consumer credit counsellor and make a proposal to creditors. The proposal can reduce the amount you pay and avoids bankruptcy. However, a consumer proposal will show on your credit report and affect your credit rating for 3 years.
  4. Bankruptcy is a process of eliminating your debts. With bankruptcy personal assets may be sold to satisfy all or some of your debts. Contributions made your RRSPs more than two years ago will be exempt from your bankruptcy and certain other personal assets (varied by province).
  5. RRSP Mortgage: If you are thinking of paying down your mortgage with your RRSP, consider an RRSP mortgage instead. The RRSP mortgage allows you to hold your own mortgage inside of your RRSP. In the end you are paying off yourself!
  6. Education Withdrawals You can withdraw under the Life Long Learning Plan (LLP) tax free as long as you pay it back later on.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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wendy February 19, 2011 at 1:12 pm

I have a question re: RRSP withdrawl. My plan was to purchase 2 5000 rrsps which would save me approx 3500 in taxes owed to govt but I don’t have the availabilty to leave the rrsp so my plan was to withdraw both immediately. What would the implications be tax wise. My income is about 72k it was higher in 2009 due to a second job.

Tax Guy February 21, 2011 at 4:15 pm

Making an RRSP contribution and then withdrawing it immediately will save you zero in taxes. The contribution is deducted from income and the withdrawal is added.

How come you can’t leave the funds in your RRSP?

dj February 21, 2011 at 7:44 pm

He will pay more tax…because his withdrawal will go to the top line…plus CRA will flag him…..a better plan would be,prepay your 2011 rsp….this works out real good if your 2011(cash) investments do well, an you want to cash in some. Also helps if your T500? is a little more then you planned for….now we just have to wait.

Tax Guy February 21, 2011 at 8:08 pm

Do you mean a T4? There is no T500.

dj February 22, 2011 at 3:28 pm

NO,i mean T5000,T5005,T5008…sometimes these slips don’t show up until May….i now understand why they take so long,but if your not on top of your investments,this can give you a lot of stress over your tax filing dead line.

Tax Guy February 22, 2011 at 5:15 pm

dj,I’m still not sure where you are going with these tax slips and how this ties to cashing out of an RRSP and using the proceeds to pay down debt.

If you are referring to the question from Wendy, my point was that if she contributes $5,000 to an RRSP and withdraws the full $5,000 in the same year, she will have achieved nothing more than to eliminate RRSP carry forward room and will have no tax benefit.

To note:

There is no such thing (as far as I am aware) as a T5000.

The T5005 is an application to register an LSVCC. It’s used by a business corporation to register itself as a LSVCC.

The T5008 is a statement of securities transactions and is used by securities dealers to report trades in taxable accounts.

Ryan February 21, 2011 at 11:14 pm

Hey I have 60,000 in stocks in an RRSP trading account. am i able to use this to invest in real estate in ARZ or FLA??

Tax Guy February 22, 2011 at 4:32 pm

Real estate is not a qualified investment. See IT320R3 – Qualified Investments.

Ryan February 22, 2011 at 8:06 pm

Thanx, For answering my Question

dj February 23, 2011 at 3:45 pm

Sorry Tax Guy…i sort of got off topic…Would like you to do a post on how to fill out a Schedule 4….i have found that using T5008 gives a good paper trail ,because the CRA gives me a once over every 3 years. Now back on topic, yes you can buy a home (in Canada) using your rsp but, an that is a big BUT…there is a ton of paper work sign (legal Fees too) plus on going fees (bank management fee)…this is not for everyone…but this worked for me in the 90’s as rates were high…the magic number is 7….best to get advise from someone you trust….like Tax Guy

Ron February 26, 2011 at 5:27 pm

Here is the situation: I (53 years old) earn 111K before tax and my wife (54 years old) works part-time and earns 25K per year. I have an indexed defined-benefit pension which is 85% of the average of my best 3 years. I have 12 more years until retirement and she has 3 years. We have a spousal rrsp with 60K in it. We each have a TFSA with about 2K each.

Our original plan was to draw out of the spousal RRSP late in our retirement, but the new pension splitting means that after retirement we will both be earning similar amounts (eliminating the income splitting benefit from the spousal RRSP).

My question is: should we start to draw the money out of the RRSP now (before we start splitting my pension income) and transfer it into our TFSA? This way the money will be taxed while she is in a low bracket and before we split pension income and are both in the same mid-bracket. Also, I have ~20,000 in unused RRSP room. Should we start making spousal contributions of say 5,000 a year and withdrawing a similar amount each year. This 5,000 contribution gives me back a big tax refund and is only taxed at her low rate when it is withdrawn. It seems like this would just “generate money” with the only disadvantage being used up contribution room (which we won’t derive any benefit from once we start pension splitting). I realize that the spousal contributions need to be in for 2 calendar years, but with the 60K already in the account there is lots of money in there that is older than 2 years.

Tax Guy February 26, 2011 at 7:45 pm

Difficult to answer without doing the analysis in depth. But when you draw it out, you pay tax. If you can defer it, you may be better off.

Bill February 27, 2011 at 9:30 pm

When a person puts there mortgage in an rsp can they use another one of their raps to make monthly mortgage payments by transferring the money from one rsp to the other?
Thanks Tax Guy, great site!

Tax Guy February 28, 2011 at 7:44 am

No. The point is to use the RRSP to replace your existing mortgage and pay back yourself.

Stephanie R March 3, 2011 at 6:37 pm

Hi Tax Guy,

My boyfriend moved from BC to Quebec over 10 years ago. Back when he was in BC (circa 1992/93), he contributed to a company RRSP. He had completely forgotten about it until just recently. We’ve been trying to track it down, but with no paperwork, vague recollection of details and changes of company ownership, we’ve had no luck. Is there some sort of central tracking database that we can access? What do people do when trying to “discover” funds from a deceased person? We think it was with Great West, but not 100% sure. They can’t seem to find it either (not sure how hard they searched…)

Any advice is appreciated!

Tax Guy March 3, 2011 at 9:24 pm

You can try asking the CRA if theyhave any record of registered plans in his name.

Debbie March 18, 2011 at 7:29 am

Hi Tax Man

I took an early retirement at age 55 I have 16200 in an RRSP what I would like to know is what percentage would I be allowed to withdraw per month or would it be better to leave it in the bank until I’m older. I would also like to know if having money in the bank effect getting CPP when I turn 60.


Tax Guy March 18, 2011 at 10:57 am

CPP is not impacted by your retirement income. When you are 65, you’ll be entitled to OAS which will be reduced if your income exceeds roughly $66,000.

You can take between $0 and 100% of your RRSP. But any withdrawals will be added to your taxable income. If you don’t need the income, you may be better off leaving it as long as possible.

Rik March 23, 2011 at 10:20 am

Hi Tax Guy:

My family and I moved to the USA and will be staying here. Between my wife and I, we have about $50K in RRSP’s in Canada which we want to pull out. If we pull out the $50K ($30K + $20K) it will be taxed 30%. However, we do not have an income in Canada, which will make our annual family income, after we with draw the RRSP’s, $50K technically. This income should be taxed lower than 30%, so would we be able to get a tax return at the end of the year?


Tax Guy March 24, 2011 at 1:42 pm

The article is intended for residents of Canada.

As a non-resident and resident of the US, you can leave your RRSP here. If you withdraw it, it will be subject to a 25% non-resident withholding tax, which you cannot recover because you do not file a tax return.

The gross amount less your lifetime contributions are added to your gross income in the US. You can claim the 25% as an itemized deduction or foreign tax credit.

Jackson March 27, 2011 at 12:23 am

Hi Tax Guy,

Sorry, I know you just said this is intended for Canadian Residents but I’m in a very similar situation to Rik. I’m 26 and moved to the USA a little over a year ago to get married. I have a tiny bit of money left with TD Canadatrust: $425 in a TFSA, and a little over $1300 in RRSP money that was locked into GIC’s when I left.

I’ll probably withdraw the $425 during an upcoming vacation visit as spending money, but as for the $1300, I’d rather add it to the savings account down here than just leave it in Canada until I hit retirement age. If I understand correctly, I’ll be taxed $130 of it (plus a bank fee I’d assume), and then I’d claim it as foreign income on my US tax. return. Would this be recommendable given the minimal amount of loss? What do you think? Take it… or leave it? I’d really appreciate your opinion on the matter.

Thanks a lot 🙂

Tax Guy March 28, 2011 at 11:44 am

The withdrawal from the RRSP would be subject to a 25% non-resident tax at source ($325). You the include the difference between all of your original contributions to the RRSP and its value on the date of withdrawal in your gross income.

You then claim the $325 withheld as a foreign tax credit or itemized deduction.

Be sure you have filed an 8891 for your RRSP.

You probably should not have a TFSA and will need to disclose it on a form 3520 or 3520-A.

Jackson April 4, 2011 at 10:03 pm

Hey Thanks very much! I take it you’re in favour of just taking the tax hit and putting the money to use down here. If not and you think it would be worthwhile to leave it invested in Canada let me know!

Also, I need to disclose that I have a TFSA even though it’s only got $425 in it? I think Bank’s down here only give you a tax form if you make $10 or more in interest throughout the year. My TFSA hasn’t come near that.. but is it just a totally different deal and I *must* disclose it? Will any of this matter if I spend the money that’s in it while on vacation?

Thanks again!

Tax Guy April 5, 2011 at 10:44 am

Unfortunately, I cannot make recommendations nor provide opinions. I’m only explaining how things work. If you would like to engage me, that’s an entirely different matter and I will provide an opinion and recommendation. But only after I gather a fair bit of data from you.

Claire March 30, 2011 at 1:39 pm

Hi Tax Guy,

I know that you get tax deduction on RRSP contribution but have to add withdrawal into your taxable income.
If I invest in stocks in my RRSP so the money in RRSP includes three parts, principle, dividends and Capital gain or loss if I sell some of the stocks. My question is that if those different source of money is taxed differently when I withdraw it.
I just like to know if I can take advantage of the tax benefit of 50% of taxable capital gain or capital loss from my RRSP investment on withdrawal.

Thank you very much!

Tax Guy March 30, 2011 at 4:32 pm

The contribution is deducted from your income dollar-for-dollar and the withdrawal is added to your income-dollar-for-dollar. The nature of the investment income (dividends, capital gains etc. is irrelevant).

If you contribute $5,000 today to an RRSP you deduct $5,000 from income. If the $5,000 grows to a market value of $10,000 and you withdraw the entire amount, you include $10,000 in taxable income.

I hope this helps.

Pamela Joyce January 20, 2012 at 10:31 am

I have a quick que. I have about $10,000 sitting in an RRSP that I had contributed to when I was younger. I know have a stable job with a good pension and with a young family and some low interest rate debt (line of credit) I am having a hard time justifying having it sit in an RRSP that keeps showing a -ve rate of return on statements (yes I know you are supposed to ride the market for the long haul but my confidence in the whole idea of RRSPs is failing). Our family pension when we are both retired will be about $90,000…so again I am not sure why I need this RRSP that is performing dismal when I could pay off debt that wee currently have.
Thanks for your help

michelle January 29, 2012 at 12:37 pm

Last year I cashed out the allowable cash portion of my pension and payed approx. $5000 in taxes.So I was wondering how much of it will I get back in income tax this year? I live in BC


Tax Guy January 31, 2012 at 1:49 pm

Hard to say without knowing how much income you earned, taxes you paid, age, deductions etc.

Tax Guy January 31, 2012 at 1:50 pm

To follow up, please undestand that I cannot comment or provide estimates of your tax returns.

Ernie January 31, 2012 at 7:54 pm

Tax Guy:

Can I offset the tax effects on an early RRSP withrawal by contributing to my RRSP later?

I know I will loose RRSP contributing room but I think I can lower my taxable income and offset the early RRSP withrawal effect…

Am I correct?


Tax Guy February 1, 2012 at 4:10 pm

If you withdraw and contribute at the same marginal tax rate the effect is neutral. I suppose the strategy may work if you expect your income to taxed higher in the near future.

You also need to be mindful that income earned in the meantime is fully taxable.

Jim Kirk February 6, 2012 at 1:46 pm

So if I have an RRSP from a previous employer and can cash it out at 20%, I get 80% right away and then pay more tax on that for next year.
You’re suggesting to transfer it to another RRSP instead?
When can you start to cash out RRSPs with less taxes?

f March 29, 2012 at 12:24 pm

“When can you start to cash out RRSPs with less taxes?”
When you die !

Dave March 30, 2012 at 4:25 pm

Dear Sir/Madam:

I have been paying down my mortgage for the past 10 years and am only $20k away from the finish line. The problem is my standard of living has become so frugal that I can barely afford groceries with the $500 bi-weekly payments. I have well over $100k in RSPs and was thinking of making several $5k withdrawls to pay this off. I am aware that I will get hit at tax time, but I will be saving $13,000 a year on mortgage payments. Any thoughts?

Many thanks in advance.


Dan June 5, 2012 at 10:29 pm

I am in the same situation, and just today decided to go for it and pay off my mortgage. I will be cashing in some rrsps but it will be so worth it.

Tax Guy June 6, 2012 at 9:59 am

You know you can use an RRSP mortgage and avoid the tax from the withdrawal.

Dean Paley (Tax Guy) March 30, 2012 at 8:57 pm

You could do an RRSP mortgage. The way it works is that you take out a mortgage from your RRSP with better repayment terms and lower payments. The RRSP mortgage pays off your existing mortgage.

The plan must be administered by a approved lender (i.e. a chartered bank or trust company) and there are fees just like a regular mortgage. You can extend the term, cut the payments, and avid paying any income tax.

Paul June 29, 2012 at 4:07 pm

If I cash in $30000 of my rrsp and they withhold $9000 how much more might I have to pay at tax time

Tax Guy June 30, 2012 at 9:57 am

It’s difficult to say without knowing how much your total income is, the other tax deducted etc.

Take a look at the tax calculator.

Jon July 2, 2012 at 3:43 pm

Hi Tax Guy,

I’m also considering this situation and would like your advice whether to withdraw from my RRSPs to pay off debt.

Currently, I make about $53K a year.
I have credit card debt of around $20K, at a rate of 11.99%, and the minimum monthly payment is calculated at interest plus $10. I am no longer charging any purchases to the card, and just concentrating on paying it off. The last minimum monthly payment was about $213.

I currently make payments of around $300 – $350 a month towards the Credit Card, and contribute $75 bi-weekly to my RRSPs, which now total around $32K. My RRSP deduction limit for 2012 is around $18K.

Should I withdraw my RRSPs to pay off my credit card once and for all, just to get rid of the debt, and then start re-contributing into my RRSP with the money that used to go to the credit card payments?

I understand that there will be a withholding tax of 30% and that I will likely have to pay an additional tax bill at the end of the year. Am I correct in assuming that the interest I’m paying on the debt still exceeds any advantage I have of maintaining the RRSP?

I just feel like at the rate I’m going, I will be an elderly person by the time the card is paid off, so the psychological aspect of getting rid of the debt right away is tempting.

What do you think? Thanks for your help!

scot July 29, 2012 at 10:32 pm

I have mounting legal bills due to a divorce. I am considering cashing in 50,000 of my RRSP’s to reduce my debt, but I feel this is a bad idea. BY the end of it all I expect that my debt will be around 80,000 or more.
What is my best option for managing this debt? I have a good credit rating and no dept on my credit cards.


Tax Guy July 30, 2012 at 9:37 pm

I want to thank you for visiting this page and taking the time to read the comments from others. However, as of July 30, 2012, I have made the decision to close comments on this article.

Comments on this entry are closed.

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