If you are in Canada, and are at a point where you need or want to withdraw money from your RRSP, please ensure that you are familiar with the rules of withdrawing it.
I've had a few income tax clients over the last couple of years who have been surprised to owe money on their income tax. The primary reason these particular clients owed money was because they withdrew money from their RRSP's but the bank/financial institution did not withhold enough tax on the withdrawal for their financial situation.
Minimum Tax Withheld on Withdrawals
The minimum tax that is withheld is dictated by Canada Revenue Agency.
If you take $5000 or less out, they withhold 10% in taxes.
If you take between $5000.01 and $15000 out, they withhold 20% in taxes.
If you take more than $15000 out, they withhold 30% in taxes.
(Note: These are the numbers for all of Canada, except Quebec, which withholds slightly more.)
Add to Income
The amount that is withdrawn gets added to your income tax as income. If you have other income from other sources (employment, investments, etc.), it is quite possible you are will need to have more money withheld for taxes! Or, alternatively, ensure that you are saving the money that you will owe on taxes in something that is earning you a bit of interest in the meantime.
Be Aware. Know Your Circumstances.
As long as you are aware of your circumstances, there will be no problem! You will make sure that either the bank or yourself withholds enough taxes so that you are not surprised come income tax filing time.
The problem is if you are not aware, and all of a sudden you realize that you owe a bunch of money as a result of withdrawing money from your RRSP's and you weren't aware that this would happen.
No one likes finding out that they owe money to the government.
Have you been surprised to owe money when filing your taxes?
How much would you have to invest in an RRSP to counterbalance owing anything in tax at year end, when no income tax has been deducted at source. So, if I make $50,000/yr and instead of having $16,500 deducted off my pay at source for income tax, I invest that $16,500 into an RRSP will I end up owing income tax at year end. At what rate would I have to invest to owe nothing?
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