RRSP is a great way to save money for your old age. These funds help you meet your expenses when you do not have any source of income after retirement. The only odd is that your RRSP withdrawals are subjected to withholding tax.
The amount of tax depends on the number of withdrawals and the province where the RRSP has been maintained. You can be charged up to 30% on the RRSP withdrawals that are too high. There are multiple ways of reducing the amount of tax, and all you need to visit an expert and get a piece of advice on how to reduce withdrawal taxes.
Reducing the Amount of Withholding Taxes
By choosing, either way, you can reduce the amount of withholding taxes and areas below.
1 Convert RRSP into RRIF
You can convert RRSP into Registered Retirement Income Fund (RRIF). You will get a steady income for the rest of your life and save money by avoiding large withholding tax.
2 Convert RRSP into TFSA
You can convert RRSP into TFSA (Tax-Free Saving Account). This will result in paying small financial penalties for converting RRSA into TFSA, but you will be allowed to make tax-free withdrawals from your TFSA.
3 Make Multiple Withdrawals
The withholding tax is charged according to the amount of withdrawal. If you are living in a province other than Quebec, you will pay 10% on withdrawals of up to $5000, 15% on $5000 to $15000, and 30% on anything above $15000.
Rather than making one withdrawal of $15000, you can make three withdrawals of $5000, resulting in 15% tax rather than 30%. By making multiple withdrawals, you can save a considerable amount of withholding taxes.
Avoiding Tax on RRSP Withdrawals
We have an idea now that how can we reduce the amount of withholding taxes on RRSP withdrawals; however, if you seek advice on reducing withdrawal taxes, you may come to know how you can even withdraw RRSP without paying tax.
The Home Buyers Plan (HBP)
This is an excellent idea for withdrawing RRSP without paying withholding taxes on RRSP withdrawals. It works only if you are considered a first-time buyer by the government, and it is only possible when you have not lived in a house owned by you or your spouse.
Under the federal Home Buyers Plan, you can withdraw up to $35000 to $70000 multiple times. The down payment of your first house will be made with the help of these funds. Now the withdrawal tax will be saved as the number of withdrawals will be considered as an HBP loan that has to be repaid in 15 years.
- The Lifelong Learning Plan (LLP)
For the education or training for you or your spouse, you can withdraw up to $10,000 per year from RRSP with the $20000 limit. The withdrawal amount will be considered a loan with ten years of maturity, and repayment will be started after five years of the first withdrawal.