Should I Take Money Out Of My RRSP Early?

One of the most common questions we get is, “should I take money out of my RRSP before age 71?”

As usual, our answer is “it depends,” In this article, we look at situations where it may make sense to draw from your RRSP before age 71.

Most people are familiar with how an RRSP works. You put money in while you’re working, and you get a tax deduction. When you turn 71, you’re required to convert your RRSP into a RRIF and begin drawing an increasing percentage from the account annually, starting in the year you turn 72. When it comes to RRSPs, the key is to make contributions while you’re in a high tax bracket and take money out while you’re in a relatively lower tax bracket. When you apply this framework to the original question, the situations where it makes sense to take money out early are easier to recognize.

Here is a perfect situation for drawing down the RRSP before age 71. Judy is 56, and has been working for a large multinational company as an executive for the last ten years earning $250 K. She and her husband Ron have always been great savers. They have built up a nest egg of $5 million in RRSPs, TFSAs, a non-registered account. Judy & Ron have a solid financial plan in place and know that they can retire whenever they want. They know they will require ~$120 K from their portfolio to support their retirement lifestyle. If Judy retires in January at age 56, she will have $0 income from now until at least age 60, which is the earliest she can start collecting CPP.

All other factors being equal, Judy is an ideal candidate to withdraw from her RRSP early. RRSP withdrawals will be taxed as ordinary income, and she can take up to $16,989 (2023 basic amount) before paying any federal income tax. She should at least consider taking the annual basic minimum before using her TFSA or non-registered account. This is a very specific situation where a high earner with no pension is retiring early. There are limitless variables you could adjust based on this situation such as lowering the salary, changing her retirement age, adding a pension etc.

Many clients have asked us if an accelerated drawdown makes sense because a neighbour or friend told them it’s better to drawdown your RRSP early. What we’ve found is that in most cases, it does not make sense to withdraw from an RRSP before age 71; Though it might seem beneficial to spread tax out over several years, it is often better not to interrupt the tax-free compounding within the RRSP. At death the full value of the RRSP will be taxed to you as though you received it all in one year, but If you think of it like a snowball, even if the snowball breaks in half when it reaches the bottom of the hill, in most cases, the half snowball is still larger than if you were breaking large pieces off from the boulder while you roll it down.

There are very few one-size-fits-all solutions in financial planning. Whether the RRSP drawdown makes sense for you is a function of your unique financial situation. Evaluating an early RRSP drawdown requires a comprehensive review of your financial situation, and estate intentions.