MONEY · TAX · Canada
Taking $10,000 out of an RRSP leaves you $6,000
The tax withheld at source is not the tax. It is a down payment — and the contribution room never comes back.
By the Yoseri News desk · · 5 min read
This article describes the rules of Canada. Income tax, pension plans and tax-sheltered accounts do not transpose from one place to another.
These are not the rules of the region you picked (): this article describes those of Canada. The reasoning holds everywhere; the account names, the caps and the ages do not.
Something unexpected, a project, a hard month. You look at your RRSP, you see $10,000 available, and you tell yourself that after the withholding you will have $8,000 left. You will have $6,000, and the account will lose $10,000 of room for good.
The withholding is not the tax
At the moment of the withdrawal, the institution takes tax at source. On $10,000, outside Quebec, that is 20% — $2,000. You receive $8,000, and many people stop there.
But an RRSP withdrawal is income. It is added to your salary for the year and taxed at your marginal rate. At 40%, the tax owed on that $10,000 is $4,000. The withholding covered $2,000: the rest arrives the following spring, as a balance owing.
| Amount | |
|---|---|
| Taken from the RRSP | $10,000 |
| Withheld at source (20%) | −$2,000 |
| Received in the account | $8,000 |
| Real tax at the marginal rate (40%) | −$4,000 |
| Balance owing the following year | −$2,000 |
| What you actually keep | $6,000 |
The 20% withholding gave the impression of a 20% cost. The cost was 40%, and half of it arrives a year late — once the money has already been spent.
The part you cannot see
A TFSA gets its room back the following year: what you take out, you can put back. An RRSP does not. The contribution room used for that $10,000 is consumed for good.
It is not $10,000 you lose, it is what that $10,000 would have done while sheltered. Invested at 5% for twenty years, it is worth $26,533. That is the real price of the withdrawal, and it appears on no statement.
What this calculation ignores
Your actual marginal rate, first: 40% is an assumption. A withdrawal made during a year with no income costs far less; made at the peak of your career, far more.
In Quebec, the withholding is split between two levels of government and the rates differ — the order of magnitude holds, the exact figure does not. And two schemes escape this mechanism altogether: the withdrawal to buy a first home and the one to go back to study, which are repaid rather than taxed.
Finally, the calculation ignores that a withdrawal can be the right decision. A debt at 19.99% costs more than $26,533 over twenty years if it runs long enough. This piece does not say what to do: it says what it costs.
So what does this mean for you?
That “I have $10,000 left in my RRSP” is a false sentence. You have $6,000 usable today, and room you will not get back.
Yoseri’s Plan page shows your registered accounts with what they hold and what they would cost to empty. It does not file your return: an RRSP withdrawal is a conversation with a professional.
Yoseri News is an educational publication. Nothing in this article is investment advice, a recommendation to buy or sell, or tax advice. Yoseri is registered as neither an adviser nor a dealer with any market authority. The tax rules described here are those of Canada, and the limits change: check your own entitlements before acting.