When you need money in a hurry, be it for something positive (buying your kid their first car) or less positive (a leak in your roof), you’ll start thinking through places to find those funds. At some point, you may consider liquidating some or all of your RRSP. That should be your sign to stop and take a beat — your RRSP should be the last place to consider.
The RRSP withholding tax discourages early withdrawal.
In short, the RRSP is a uniquely Canadian program that lets you grow a retirement fund larger and faster by not paying tax on your gains. At the same time, the RRSP program rewards contributions by subtracting the amount from your taxable income so you pay less tax over your working life and have more when you retire.
Looking for an overview about the RRSP? We took a deep dive into the RRSP, its history and its purpose here.
Beneficial as the RRSP program is for you, it’s even more so for the Government of Canada. The federal government created the program to help ensure more financially healthy retirees, which is obviously in the country’s best interests. As such, they strongly penalize early withdrawals.
The lowest RRSP withholding tax rate is still in the double digits.
The Government of Canada website doesn’t even try to bury it or dress it up. It’s right there, almost as a warning:
- You’ll pay a 10% withdrawal tax up to $5,000.
- You’ll be hit with a 20% withdrawal tax on amounts between $5,001 and $15,000.
- You’ll get charged a 30% withdrawal tax anything over $15,000.
For perspective, if you withdraw $20,000 from your RRSP, your financial institution will typically withhold 30% ($6,000) right away (outside Quebec). At tax time, the full $20,000 is included in your taxable income, and the $6,000 withheld is applied as a credit toward the total income tax you owe for the year. Depending on your marginal tax rate, you may owe more tax—or get some of the withholding back.
The RRSP early withdrawal penalty is just the beginning.
To further disincentivize early withdrawal, the total you remove is added to your taxable income for the year you withdrew it. This will almost certainly raise your tax bill for the year and could put you into a higher tax bracket.
The withholding tax isn’t an extra tax—it’s a prepayment. The real cost is that the withdrawal increases your taxable income for the year, which can raise the total income tax you owe (and potentially push you into a higher bracket).
But probably the most punitive repercussion of early withdrawal from your RRSP is the loss of RRSP room. Once you remove money from your RRSP, you can’t put it back.
So, while you could take the $20,000 to fix the roof or put towards the car, think about what it will cost you in the long run beyond the immediate tax penalty. Specifically, think about the compounding tax-free gains on $20,000 from now until the day you retire.
Is there ever a reason to consider an early RRSP withdrawal?
In four specific conditions, it could make sense to look at your RRSP as a source of quick money:
1) To fund education
The Lifelong Learning Plan The Life (LLP) lets you withdraw up to $10,000 per year, to a maximum of $20,000 total, to finance full-time training or education for you or your spouse/common-law partner. If you meet the conditions, the withdrawal isn’t included in income at the time and no withholding tax is taken; you then repay over a period that’s generally 10 years.
2) To buy your first home
If you’re an eligible first-time home buyer, the Home Buyers' Plan lets you make a tax-free RRSP withdrawal of up to $60,000, and you’ll have 15 years to pay it back.
3) To cover a period of low income
Maybe you’re starting from the bottom in a new industry? Maybe you’ve quit your job to go out on your own as an entrepreneur? If you know you’re not going to earn very much over the next year, having money to live on far outweighs the tax hit.
4) To take greater advantage of the spousal RRSP rules
The spousal RRSP is a plan specifically for married or common-law couples with a wide income disparity. In this case, the partner with the higher income would split their contributions between their RRSP and their partner’s RRSP. After two full calendar years, the lower earner can withdraw funds and treat it like their taxable income with no additional penalties. However, withdrawals before two full calendar years will be treated, taxed and penalized as an early withdrawal by the higher earner.
Spousal RRSPs can help equalize retirement income. But if the higher-income spouse contributed to any spousal RRSP in the year of withdrawal or either of the two preceding years, some or all of the withdrawal may need to be reported as income by the contributing spouse under the attribution rules.
An alternative to liquidating some or all of your RRSP today.
While all the information shared so far in this piece is good to know, none of it will change the fact that you need money now and don’t have it. If you're not going to get it from your RRSP, you may consider other available lending options, for e.g. a line of credit with your financial institution.. If you can commit to paying it off regularly and quickly, the interest payments shouldn’t be too prohibitive. If you own a home, you can look into a Home Equity Line of Credit.
An alternative to liquidating some or all of your RRSP tomorrow.
The Government of Canada introduced the Tax-Free Savings Account (TFSA) on January 1, 2009, as another option for growing tax-free wealth. The TFSA is like a federally supported rainy-day fund for the day your kid gets into school or when your roof springs a leak. Unlike RRSP contributions, money put into a TFSA isn’t deducted from the year’s taxable income. But also unlike the RRSP contributions, TFSA funds can be withdrawn and reinvested at any time.
What should you be contributing in 2026?
Many factors will go into your contribution goals for 2026, ranging from your expected income to your immediate needs to your retirement goals. When your financial life all runs through one office, the professionals you’ll rely on (tax accountant, insurance broker, wills & estates lawyer, investment advisor, etc.) work together to help you plan the best outcomes for your short-term tax obligations and long-term financial health.
If you don’t yet have your RRSP and TFSA contribution strategy set for 2026, get help from Optimize today.. Because a great way to create wealth with intention is to protect it with equal intentionality.
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Disclaimer - This article is for information purposes only and does not constitute tax or investment advice. Please consult a licensed tax professional for tax advice and a licensed Portfolio Manager or Associate Portfolio Manager of Optimize for investment advice.