Q&A: RRSP withdrawals

Question: A friend of mine withdrew $25,000 from his RRSP and
paid $7,500 tax. I told him that was a big mistake. Instead of withdrawing $25,000
at one time, he can withdraw $5,000 five different times. So that this way he
only pays $2,500 in taxes and so saves $5,000. Am I right? You be the arbitrator.
– George N.

Gordon Pape answers: Yes, you’re right. You’re
also wrong. Here’s why.

Whenever money is withdrawn from an RRSP, tax is withheld at source. The percentage
withheld depends on the size of the withdrawal. In all provinces except Quebec
if the withdrawal is $5,000 or less, 10% is withheld from the payment. For amounts
between $5,001 and $15,000, the withholding is 20%. For higher amounts, it is
30%. So yes, five withdrawals of $5,000 each would only have $2,500 withheld,
whereas a $25,000 withdrawal attracts a 30% withholding, or $7,500.

But, and here is where you are wrong, that is not the final tax liability.
That amount is only determined when the return for the year is filed. To use
your example, $25,000 will be added to your friend’s total income for
the year and taxed at his marginal rate. If that rate is 35%, the total tax
due on the money will be $8,750. In that case, he will owe the government another
$1,250 ($8,750 – $7,500 = $1,250). If he had followed your suggestion and done
five withdrawals, he would owe an additional $6,250 ($8,750 – $2,500 = $6,250).

One final point: some financial institutions limit the number of free RRSP
withdrawals a person can make each year. This is done to discourage too many
small withdrawals. Check with the RRSP administrator for information.

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