Cashing out your RRSP early can be expensive. You usually face withholding tax right away, then pay full income tax on the withdrawal when filing your return.
What happens financially
- Withholding tax is deducted by your institution.
- Withdrawal is added to your taxable income for the year.
- You may owe additional tax at filing time.
- Contribution room used for that money is lost permanently.
Exceptions
Home Buyers’ Plan and Lifelong Learning Plan allow temporary withdrawals under strict repayment rules.
Before withdrawing
- Compare alternatives: emergency fund, line of credit, budget cuts.
- Estimate total tax impact using your marginal bracket.