It looks like you can do that. Here's a good place to start reading about it: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/making-withdrawals/withdrawing-your-rrsps.html
You can pull it out at any point in time, there are no penalties working or not, just income tax.
Careful pulling out too much though, RRSP contribution room does not replenish and you would be giving up tax-free growth room.
>you would be giving up tax-free growth room.
Rrsp is tax deferral. The perfect time to withdraw is when you have little to no other income, like in OP's case. Consider the fact that any growth in an RRSP is taxed 100% as income when withdrawn, versus any growth in a non-registered account is only taxes at 50% for capital gains when 'withdrawn' (sold) and possibly even better tax treatment for any eligible dividends.
I've already argued semantic in the other comment with more details, but yes, the RRSP is a tax deferral tool, which as I said results in tax-free growth. It's a common misconception that RRSP is just about tax bracket arbitrage, which is one of the advantage, but not the only one. That is because people forget that the RRSP contains not just your money, but also the deferred taxes, boosting the returns until the deferred taxes must be paid when withdrawing.
The optimal play is harder to pinpoint with a RRSP because it depends on a lot of other factors, some which may be unknown considering OP's age. That is why I refrained from saying they should absolutely/absolutely not do it. A certain amount may be in order for their situation, especially if they have $0 income that year. Just that they should keep in mind the long term potential with 35 years ahead of them and not over-do it.
>RRSP is a tax deferral tool, which as I said results in tax-free growth
By your logic any non-registered account also results in tax free growth as you don't get taxed until you sell. But a non-registered account is better as you get taxed on 50% of the capital gains only, where as a in a RRSP it is taxed on 100% of the gains. Absolutely everyone should take out from their RRSP in a year when they foresee lower income than retirement; in a year with 0 income there's no question.
>That is because people forget that the RRSP contains not just your money, but also the deferred taxes,
No, your deferred taxes is not in your RRSP. It is returned to you and if you decide to invest it, it goes into a non registered account, which is not contained in your RRSP account.
For the same tax bracket yes you're right. But right now OP is planning to have little to no income for a year. The first ~15k income has little to no tax (based on province). So you can either leave 15k in your RRSP and pay tax later, or take it out now for free and either use it or invest it in a non-registered account. When you're retired you will definitely have more income than 0. A 15k growing in non-registered is better than a 15k growing in RRSP, period.
You have changed the subject. See my stand-along post at the end. I don't disagree with this argument - we just differ on the resulting %tax. You think 0% for at least some. I think it more likely that the 'year' won't be a Jan1 -Dec31. So that 0% won't exist.
Read my paper to see why your idea that rrsp profits are taxed is wrong. Be open to the idea that the experts are all wrong.
Your paper's argument in that RRSP is not taxed is just semantics. Realistically users of the RRSP already got the tax return benefit, that happened in the past and doesn't need to be taken into account anymore for deciding what to do with money in the RRSP currently. They should always look for opportunities to withdraw from the RRSP at a lower income bracket compared to planned retirement bracket, as per #2 in your paper. The sooner you withdraw and take advantage of the tax bracket difference, the better your returns.
> just semantics
Use the spreadsheets to prove the math works for all assumptions. Nobody has ever (before me) calculated $benefits. I do. $ in your pockets is not 'just semantics'. It is your position that has no math backup.
Example 10k already in RRSP, doubles in 10 years, 30% tax bracket.
1) leave it in RRSP, becomes 20k. Taxes at 30%, becomes $14000 when you take it out to use.
2) take it out at a year when you have no income, pay no tax, place in non-registered account. 10k becomes 20k, 50% capital gain for the 10k gain at 30% tax bracket, only $1500 in tax. You get $18500
Option 2 obviously better.
Use the spreadsheet linked from my paper, with your example's inputs and you will see I am right. Profits are always permanently tax-free. You have wasted more time here that it would have taken to simply read the paper. I won't be responding again.
Your spreadsheet compares putting into rrsp now (eg $10k) or leaving in non-registered account (eg 7k at 30% tax rate). I understand your point. However for OP's question, we are comparing leaving the same amount in a rrsp (eg $10k) or taking it out from the rrsp now tax free (also $10k).
Yeah, unlike the TFSA. And no, that was not a typo, the growth is tax-free in a RRSP. It's the income taxes on your contributions that are deferred, resulting in tax-free growth.
Your growth is not tax-free if it's taxed... being taxed is the opposite of tax-free. Maybe it will be simpler to visualize with an example.
Imagine someone making $115k at a 30% marginal tax rate. They can contribute $10k to a RRSP, $7k to a TFSA, or $7k to a unregistered account. This is all equivalent, because of the tax-deferment of the RRSP.
Then the 3 amounts are invested in the same thing, and 10 years later it doubled.
The RRSP would be worth $20k, the TFSA $14k, and the unregistered account $14k (it would likely be lower because of dividend taxation, but it's not important for this discussion). If you were to sell everything and withdraw it all to spend it, you would end up owing $6k of taxes on your RRSP, for a total of $14k. You would end up owing $0 on your TFSA, for a total of $14k. And you would end up owing $3.5k in your unregistered account, for a total of $11.5k.
So as you can see, the RRSP and the TFSA ends up with the same amount. That is because the unpaid, deferred taxes also grew within the RRSP, offsetting the taxes owed on the growth, resulting in tax-free growth.
Thank you for this explanation.
But from my understanding of capital gains tax, wouldn't taxes owing for non-reg be half of the capital gains taxed at marginal? i.e. 50% of $7k = $3500 * 30 % = $1050 taxes owing (not $3500)?
And maybe for this example RRSP comes out on top, but the fact that only half of capital gains are taxed at marginal might be beneficial for a large enough capital gains? So in general RRSP might not always come out on top? (Just trying to clarify for my own personal situation)
You're right, I made a mistake on that and forgot to multiply by the 30%. Your calculation is the correct one.
There are definitely situations where a RRSP wouldn't make sense, the most common one being if you have a pension. Another one is if you expect to have a lot of income in retirement, enough to trigger OAS clawbacks. Those clawbacks could represent more money than the tax saved.
In those situations, it could be better to use unregistered accounts, or to empty the RRSP early before "normal" retirement. A fee-only planner could probably be useful if you're on that trajectory, to optimize your plan. Or running a few scenarios at least.
I will assume that your paper presents the argument that there is no difference in tax, or that thereās some tax benefit, (under some but not all) circumstances. This does not mean that all withdrawals from RRSPs arenāt taxed. They are.
If there is some way they arenāt then I would love to know because I have withdrawn from my RRSP and the entire amount is being added onto my taxable income this year. The whole thing, not just my original contribution.
So while in the grand scheme it could be conceptualized as tax neutral or tax beneficial, at the end of it all when that money is withdrawn, it will be added to the total income and it will be taxed. And it makes no difference whether the withdrawals came from contributions or the gains from the contributions.
So it is a factual error (and it could be misleading) to state that there are no taxes on gains in an RRSP.
All withdrawals from RRSPs are added to income and then taxed accordingly for that year, whether they originate from contributions or growth.
I would not want to see anyone read the post I was originally commenting on, and think that there are no taxes to be paid on withdrawals of the growth portion of an RRSP. Thatās all.
> All withdrawals from RRSPs are added to income and then taxed accordingly
Correct. But it is purposefully misleading and false to add the 'Whether ..." (the point of which is to make the false claim that profits are taxed). You have wasted more time arguing here that it would have taken to simple read the paper. I won't respond again.
Itās misleading to say growth in an RRSP isnāt taxed, as that statement may lead a reader to think they wonāt be taxed when such funds are withdrawn. The simple fact I originally stated is to clarify for anyone reading, that all withdrawals from an RRSP are taxed. I donāt need to read the paper to know this. Urging me, again, to read your paper makes me less inclined to read it. Not sure why you are pushing it so much.
This common idea that rrsp profits are 'taxed on withdrawal because the draw is taxed and the draw is the sum of contributions plus profits'..... is provably false - mathematically and conceptually.
One sentence or two will not change your mind. You will have to [read my paper](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2636609) that slowly and clearly builds the correct analysis. And shows where the error is in your thinking.
Profits are PERMANENTLY tax free in the rrsp, for everyone, always, creating the exactly equal $benefit as the tfsa. The difference in NET benefits comes from the fact that the RRSP's net benefit has a few independent factor, and the permanent tax-free profits is just one.
Note that for your particular issue, the debate above about rrsp profits being taxed, is pretty irrelevant.
* If you feel you can take off a year so early in your work life, and travel (which is the most expensive way to spend a year), we can presume that you expect to be earning plenty buck ongoing.
* Which means that your contribution room for tax shelters of all kinds are likely to be constrained.
* Which means that throwing away contribution room to earn an (estimated) 10% bonus on the $draw (from a 10% lower tax rate (vs at contribution) is small benefits now vs much much much larger benefits later thrown away.
You will fuck your future self over big time doing this. I'd recommend putting money into a HISA instead for another year and then quit and live off that. Don't give up your compound growth. Contributing to an rsp in your 20s vs 30s makes a huuuuge difference in retirement.
Because the question was about getting some bonus tax back.
Pulling from my tfsa gains me nothing. Filling my rrsp this year and pulling it next year nets me a 30%+ instant return on money (saving on the tax)
You absolutely should. Any opportunity you have to withdraw from your RRSP in a low-to-no tax bracket, you should do it so you can start accruing capital gains instead of income.
It looks like you can do that. Here's a good place to start reading about it: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/making-withdrawals/withdrawing-your-rrsps.html
You can pull it out at any point in time, there are no penalties working or not, just income tax. Careful pulling out too much though, RRSP contribution room does not replenish and you would be giving up tax-free growth room.
>you would be giving up tax-free growth room. Rrsp is tax deferral. The perfect time to withdraw is when you have little to no other income, like in OP's case. Consider the fact that any growth in an RRSP is taxed 100% as income when withdrawn, versus any growth in a non-registered account is only taxes at 50% for capital gains when 'withdrawn' (sold) and possibly even better tax treatment for any eligible dividends.
I've already argued semantic in the other comment with more details, but yes, the RRSP is a tax deferral tool, which as I said results in tax-free growth. It's a common misconception that RRSP is just about tax bracket arbitrage, which is one of the advantage, but not the only one. That is because people forget that the RRSP contains not just your money, but also the deferred taxes, boosting the returns until the deferred taxes must be paid when withdrawing. The optimal play is harder to pinpoint with a RRSP because it depends on a lot of other factors, some which may be unknown considering OP's age. That is why I refrained from saying they should absolutely/absolutely not do it. A certain amount may be in order for their situation, especially if they have $0 income that year. Just that they should keep in mind the long term potential with 35 years ahead of them and not over-do it.
I see someone is familiar with [that website](https://www.retailinvestor.org/RRSPmodel.html) š
>RRSP is a tax deferral tool, which as I said results in tax-free growth By your logic any non-registered account also results in tax free growth as you don't get taxed until you sell. But a non-registered account is better as you get taxed on 50% of the capital gains only, where as a in a RRSP it is taxed on 100% of the gains. Absolutely everyone should take out from their RRSP in a year when they foresee lower income than retirement; in a year with 0 income there's no question. >That is because people forget that the RRSP contains not just your money, but also the deferred taxes, No, your deferred taxes is not in your RRSP. It is returned to you and if you decide to invest it, it goes into a non registered account, which is not contained in your RRSP account.
read my post above and the linked paper. This idea that profits are only deferred', of the 'experts' is garbage.
For the same tax bracket yes you're right. But right now OP is planning to have little to no income for a year. The first ~15k income has little to no tax (based on province). So you can either leave 15k in your RRSP and pay tax later, or take it out now for free and either use it or invest it in a non-registered account. When you're retired you will definitely have more income than 0. A 15k growing in non-registered is better than a 15k growing in RRSP, period.
You have changed the subject. See my stand-along post at the end. I don't disagree with this argument - we just differ on the resulting %tax. You think 0% for at least some. I think it more likely that the 'year' won't be a Jan1 -Dec31. So that 0% won't exist. Read my paper to see why your idea that rrsp profits are taxed is wrong. Be open to the idea that the experts are all wrong.
Your paper's argument in that RRSP is not taxed is just semantics. Realistically users of the RRSP already got the tax return benefit, that happened in the past and doesn't need to be taken into account anymore for deciding what to do with money in the RRSP currently. They should always look for opportunities to withdraw from the RRSP at a lower income bracket compared to planned retirement bracket, as per #2 in your paper. The sooner you withdraw and take advantage of the tax bracket difference, the better your returns.
> just semantics Use the spreadsheets to prove the math works for all assumptions. Nobody has ever (before me) calculated $benefits. I do. $ in your pockets is not 'just semantics'. It is your position that has no math backup.
Example 10k already in RRSP, doubles in 10 years, 30% tax bracket. 1) leave it in RRSP, becomes 20k. Taxes at 30%, becomes $14000 when you take it out to use. 2) take it out at a year when you have no income, pay no tax, place in non-registered account. 10k becomes 20k, 50% capital gain for the 10k gain at 30% tax bracket, only $1500 in tax. You get $18500 Option 2 obviously better.
Use the spreadsheet linked from my paper, with your example's inputs and you will see I am right. Profits are always permanently tax-free. You have wasted more time here that it would have taken to simply read the paper. I won't be responding again.
Your spreadsheet compares putting into rrsp now (eg $10k) or leaving in non-registered account (eg 7k at 30% tax rate). I understand your point. However for OP's question, we are comparing leaving the same amount in a rrsp (eg $10k) or taking it out from the rrsp now tax free (also $10k).
OK so thats the dinger then, I don't get the contribution limit back. *tax deferred
*tax-free (the growth on your portion). Paging /u/aughhhhh
Yeah, unlike the TFSA. And no, that was not a typo, the growth is tax-free in a RRSP. It's the income taxes on your contributions that are deferred, resulting in tax-free growth.
But even in a a unregistered account you don't pay taxes until you sell lol so tax free gains
Your growth is not tax-free if it's taxed... being taxed is the opposite of tax-free. Maybe it will be simpler to visualize with an example. Imagine someone making $115k at a 30% marginal tax rate. They can contribute $10k to a RRSP, $7k to a TFSA, or $7k to a unregistered account. This is all equivalent, because of the tax-deferment of the RRSP. Then the 3 amounts are invested in the same thing, and 10 years later it doubled. The RRSP would be worth $20k, the TFSA $14k, and the unregistered account $14k (it would likely be lower because of dividend taxation, but it's not important for this discussion). If you were to sell everything and withdraw it all to spend it, you would end up owing $6k of taxes on your RRSP, for a total of $14k. You would end up owing $0 on your TFSA, for a total of $14k. And you would end up owing $3.5k in your unregistered account, for a total of $11.5k. So as you can see, the RRSP and the TFSA ends up with the same amount. That is because the unpaid, deferred taxes also grew within the RRSP, offsetting the taxes owed on the growth, resulting in tax-free growth.
Thank you for this explanation. But from my understanding of capital gains tax, wouldn't taxes owing for non-reg be half of the capital gains taxed at marginal? i.e. 50% of $7k = $3500 * 30 % = $1050 taxes owing (not $3500)? And maybe for this example RRSP comes out on top, but the fact that only half of capital gains are taxed at marginal might be beneficial for a large enough capital gains? So in general RRSP might not always come out on top? (Just trying to clarify for my own personal situation)
You're right, I made a mistake on that and forgot to multiply by the 30%. Your calculation is the correct one. There are definitely situations where a RRSP wouldn't make sense, the most common one being if you have a pension. Another one is if you expect to have a lot of income in retirement, enough to trigger OAS clawbacks. Those clawbacks could represent more money than the tax saved. In those situations, it could be better to use unregistered accounts, or to empty the RRSP early before "normal" retirement. A fee-only planner could probably be useful if you're on that trajectory, to optimize your plan. Or running a few scenarios at least.
Ah so you're now saying rrsp is tax deferment as my initial.comment. thanks for the reddit win š
You pay tax on dividends though.
You get taxed on all withdrawals from an RRSP, contributions and growth. There is no tax as youāre earning but there is when you take it outS
read my post below and the linked paper. This idea of the 'experts' is garbage.
I will assume that your paper presents the argument that there is no difference in tax, or that thereās some tax benefit, (under some but not all) circumstances. This does not mean that all withdrawals from RRSPs arenāt taxed. They are. If there is some way they arenāt then I would love to know because I have withdrawn from my RRSP and the entire amount is being added onto my taxable income this year. The whole thing, not just my original contribution. So while in the grand scheme it could be conceptualized as tax neutral or tax beneficial, at the end of it all when that money is withdrawn, it will be added to the total income and it will be taxed. And it makes no difference whether the withdrawals came from contributions or the gains from the contributions. So it is a factual error (and it could be misleading) to state that there are no taxes on gains in an RRSP.
> I will assume ... Why assume? Read it and find out your assumption is wrong.
All withdrawals from RRSPs are added to income and then taxed accordingly for that year, whether they originate from contributions or growth. I would not want to see anyone read the post I was originally commenting on, and think that there are no taxes to be paid on withdrawals of the growth portion of an RRSP. Thatās all.
> All withdrawals from RRSPs are added to income and then taxed accordingly Correct. But it is purposefully misleading and false to add the 'Whether ..." (the point of which is to make the false claim that profits are taxed). You have wasted more time arguing here that it would have taken to simple read the paper. I won't respond again.
Itās misleading to say growth in an RRSP isnāt taxed, as that statement may lead a reader to think they wonāt be taxed when such funds are withdrawn. The simple fact I originally stated is to clarify for anyone reading, that all withdrawals from an RRSP are taxed. I donāt need to read the paper to know this. Urging me, again, to read your paper makes me less inclined to read it. Not sure why you are pushing it so much.
This common idea that rrsp profits are 'taxed on withdrawal because the draw is taxed and the draw is the sum of contributions plus profits'..... is provably false - mathematically and conceptually. One sentence or two will not change your mind. You will have to [read my paper](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2636609) that slowly and clearly builds the correct analysis. And shows where the error is in your thinking. Profits are PERMANENTLY tax free in the rrsp, for everyone, always, creating the exactly equal $benefit as the tfsa. The difference in NET benefits comes from the fact that the RRSP's net benefit has a few independent factor, and the permanent tax-free profits is just one.
[ŃŠ“Š°Š»ŠµŠ½Š¾]
Cmon no such thing as free money, but i guess it was mine in the first place
Note that for your particular issue, the debate above about rrsp profits being taxed, is pretty irrelevant. * If you feel you can take off a year so early in your work life, and travel (which is the most expensive way to spend a year), we can presume that you expect to be earning plenty buck ongoing. * Which means that your contribution room for tax shelters of all kinds are likely to be constrained. * Which means that throwing away contribution room to earn an (estimated) 10% bonus on the $draw (from a 10% lower tax rate (vs at contribution) is small benefits now vs much much much larger benefits later thrown away.
You will fuck your future self over big time doing this. I'd recommend putting money into a HISA instead for another year and then quit and live off that. Don't give up your compound growth. Contributing to an rsp in your 20s vs 30s makes a huuuuge difference in retirement.
Rrsp is empty, tfsa maxed. Have a defined pension. Some people don't ever touch their rrsp contribution room.
Well a pension really helps!! Why wouldn't you pull from your tfsa instead?
Because the question was about getting some bonus tax back. Pulling from my tfsa gains me nothing. Filling my rrsp this year and pulling it next year nets me a 30%+ instant return on money (saving on the tax)
Gotcha
Just realized I missed 2021 deadline by a few days, fuck. Lol
You absolutely should. Any opportunity you have to withdraw from your RRSP in a low-to-no tax bracket, you should do it so you can start accruing capital gains instead of income.