Retirement » RRSP/RRIF

3 reasons to avoid withdrawing money from RRSPs before retirement

“Learn from the mistakes of others; you can’t live long enough to make them all yourself.” – Eleanor Roosevelt

Over the past couple of months, I’ve noticed a definite increase in the number of calls that I’m getting from people who want to know if they can withdraw money from RRSPs. The reasons for wanting to withdraw vary from person to person but essentially they boil down to the same thing: something unexpected happened, they need money and the only savings they have are in their RRSP. Having been in that same position in the past, I understand all too well the feeling of being underwater financially and grasping at whatever options I had to save me from drowning. However, I also understand all too well the consequences of those choices and how long it can take to ‘catch up’ with your retirement savings plan once you get back on your feet.

Related article: Everything you need to know about RRSPs

Here are three things I learned from my own experience that, hopefully, might help you avoid making the same mistakes:

Lack of savings = increased vulnerability

While we know that saving makes sense, not enough of us make it a priority. With easy access to credit, many people feel less pressure to save because there’s always a line of credit or a credit card available in case of an emergency. The problem with this is that, if that emergency happens to be accompanied by a drop in income, your access to new credit will disappear and the debt you already have will become increasingly difficult to manage. Eventually, when all your available credit is maxed out, you’ll find yourself at an entirely new level of financial trouble; one that’s incredibly difficult to escape from without options such as bankruptcy, consumer proposal or another debt reduction program.

Related article: Are your protected from financial disaster?

Life is unpredictable. None of us know what the future has in store but having savings outside of your RRSP gives you a “buffer” against unexpected expenses or a sudden drop in income due to illness or job loss. The less you have in savings and the more debt you carry, the more vulnerable you are. If the only savings you have are inside your RRSP then it’s in your best interests to find a way to save more.

RRSP withdrawal = taxes

Money that is held inside a RRSP account is considered tax-deferred. That means that you don’t pay any taxes on it until you withdraw it from your RRSP account. One of the major advantages of RRSPs is that contributing to a RRSP account reduces your taxable income and puts more money in your pocket. If we want to take full advantage of RRSPs then we should be putting money in while we’re working and taking it out in retirement when our income is lower and we’re paying less tax. If you take money out while you’re working, the amount you withdraw is added to your income for the year and you’re taxed at whatever your marginal tax rate is.

Related article: Understanding Marginal Tax

For example: Jeff earns $90,000/year and decides to withdraw $20,000 from his RRSP. This makes his total income for the year $110,000 which, in Alberta, puts him in a 36% tax bracket and so he will have to pay $7,200 (36%) in taxes on that withdrawal.

Some of the taxes that Jeff owes will be withheld by his financial institution when he makes the withdrawal. The amount that’s withheld is determined by the withdrawal amount: $5,000 or less = 10%; $5,000-$15,000 = 20%; more than $15,000 = 30%. However, his financial institution has no way of knowing what Jeff’s income will be for the year and so, given that he’s in a 36% tax bracket, there’s a good chance that Jeff will owe more money in taxes when he files his return. That can be a nasty shock at tax time.

Related article: Understanding withholding tax

Catching up on retirement savings = not easy

Five years ago, I pulled $10,000 from my RRSP account. I’d done an ok job of paying down debt but a poor job of building up an emergency fund so, when life handed me a house purchase, a marriage breakdown and a job loss, all within the space of 3 months, it didn’t take long for me to sink further into debt than I’d ever been before. The withdrawal cost me about $2,000 in taxes and the remaining $8,000 kept the debt demons away for a while, but it took a long time for me to get back on my feet and into a position where I could start saving again. Over the past five years, that $10,000 would have grown to about $13,500 but, if I’d continued to save $200 a month, it would have grown to about $27,300.

Related article: The hidden cost of debt

When you pull money from your RRSPs, it’s not just about the amount you withdraw but what that money could have grown to over time. When I pulled $10,000 from my account, I took about $59,000 out of the hands of my 65 year old self. If I factor in the impact of lost savings from the years that I didn’t contribute to RRSPs while I was getting out of debt then that number is closer to $90,000. Five years later, replacing that amount will take far more than the original $10,000 because my time frame is shorter. Assuming a 5% annual return, I’d need to save an additional $100/month (on top of my regular retirement savings) for the next 25 years to replace the $59,000, that’s a total investment of $30,000. If I wanted to replace the full $90,000 then that’s an additional $155/month (or $46,500). Looking at those numbers, it’s easy to see why, when people pull money from their RRSP accounts, it has a significant impact on their retirement account balance at 65.

A recent report, published by the Broadbent Institute, found that only 15-20% of middle-income Canadians have saved anywhere near enough for retirement. Whether this is a result of poor savings habits or repeatedly dipping into RRSPs is unknown, but I’m willing to bet that both were significant factors. With savings rates in Canada far lower than they should be and with debt rates being far higher, it’s important that we do whatever we can to keep as much money in our pockets as possible so it can work for us rather than our creditors or favourite retailers. Steering clear of raiding our RRSPs is one common-sense commitment we can all make to help achieve our retirement goals.

What do you think?


  1. John in Mtl

    Hello Sarah,

    Thank you for writing these articles, I’m sure it helps a lot of people realize the importance of financial planning for retirement.

    I’ve been pretty good with saving and investing over the last dozen years or so, getting older and wiser means money is no longer burning a hole in my pocket and I can afford to sock it away for those retirement years.

    I have a rather different problem than most readers: I’ve taken to seriously trying to understand the financial systems, money systems, credit and markets that sort of now “over-govern” our lives – in the modern world is “everything is a commodity”! Quite the neophyte still, but the more I read, the more I am appaled by the chaos and the uncertainty, the sheer contradictions and predictions of so many “experts”. This has me quite worried about my future as a retiree. Before I had money, I never worried about it and just went about life merrily. Now that I have some, I worry pretty much constantly about it and the possibility that the whole edifice of finance will come crashing down once more and I’ll be left shortchanged. And no, its not necessarily a question of misallocation and high risk investments on my part; rather, its just plain old not seeing my accumulated capital vanish on account of the grand Ponzi scheme and casino that seem to be the financial world nowadays.

    I thought that as I would grow older I’d feel more and more secure. In many aspects of my life I am but on finance, this insecurity is really starting to drive me bonkers! Words of wisdom would be welcome. What’s a future retiree to do?

    Thank you.

    • Claude Mayrand


      You have come upon the same problem I’ve had all my financial life: how can I evaluate and then trust the pundits of all stripes?

      It’s like tasting olives: until you’ve puckered up after trying them, you’ll never know.

      My own conclusion is to educate myself. I found that it is impossible for any one person to know everything, and it is impossible to adequately answer someone else’s financial questions perfectly.

      By becoming my own expert, I had no one to blame; financial mistakes, like learning to crawl, teeter, then walk, teaches one to strut, sometimes run.

      There are no winners in the blame game.

      John, I’m also a retiree and my retirement “job” is looking after my retirement income. With the Internet, it is portable; I can still go on trips, almost anywhere, and access my accounts.

      • John in Mtl

        Claude, thank you for taking time to reply. Yes, it is in my current plans to continue to educate myself in finance so I can acquire a more secure feeling about it all, that is definitely the way to go. A lot of my reflexions on this were pointing in that direction already. The other would be to hire a good fee-based advisor and engage in serious discussions until I’m ready to manage it on my own.

        I also agree that i’ll have a lot of time in retirement to manage money affairs so yes, it could be my new “full-time job”, and my only job if I so wish -;)

  2. Claude Mayrand


    May I point out that the withheld amount for taxes is cumulative within a calendar year.

    A first $5,000 withdrawal is 10%, as expected – outside Québec; a second $5,000 is 20% – surprise! because the cumulative for the year is $10,000.

    As to allocating after-tax money to an emergency fund… It’s very difficult for the 99% of us. I might add that it’s possible if the emergency fund is invested in a liquid cash-generating product with automatic re-investment of distribution, such as stocks, ETFs, closed-end funds. There may be potential to obtain a Margin Loan with a non-registered investment account; one could pay off the 20 or 30 percent credit card with a 4% Margin Loan where the interest is tax deductible because the account is generating income which is taxable at very advantaged rates.

    As to depositing the money in a savings account, the return is simply too low and may actually cause one to pay income tax on the interest. A GIC or government savings bond is not liquid enough, doesn’t pay enough interest and will also trigger income tax expenses. You might say the safety of the capital has many risks.

  3. John Gangl

    I’ve been withdrawing RRSP money and then put it in a TFSA. I’m retired but still work a bit part-time and receive my DB pension monthly. Does this make sense?

  4. Yoga Gal

    Maybe what I’m about to ask about should be a separate conversation thread. It is this: Is it wise to withdraw from an RRSP as one gets closer to age 65 and 70, to reduce the amount of minimum withdrawals from future RIF accounts?

    I am reading 2 books: 1. Your Retirement Income Blueprint, 2. Canada’s Public Pension System Made Simple. Both books advocate that the pre-senior or senior should try to reduce the size of their RSP that they will have to convert to a RIF at age 71. The pension book says to even take a sizable withdrawal every second year, paying the income tax due. Some people who have a large RSP will be in for a nasty tax obligation starting with their first mandatory RIF withdrawals. One should also try to avoid OAS clawbacks, by reducing the RSP and thus the future RIF size. What are your opinions on this?

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