One of the biggest selling points about the TFSA (Tax Free Savings Account) is that your money grows tax free, and you can access it when you need it — tax free. This feature also makes it an ideal savings tool to save for emergencies, instead of using your RRSP. There are, however, two occasions before retirement when it’s ok to withdraw from your RRSP: as part of the Life-Long Learning program (if you choose to go to school to upgrade your skills) or as part of the Home Buyers Plan.
There are a few things to keep in mind about taking early withdrawals from your RRSP:
- The withdrawal will count as income when you file your taxes in the following year
- You have to pay a higher rate of tax on your withdrawal
- You will lose contribution room, which will mean you’ll have less saved for retirement
To learn more about the pitfalls of early RRSP withdrawal, click here to read Canada Life’s article “Early Withdrawals from Your RRSP”. And take a look at their “Early Withdrawal Impact” calculator which further illustrates how this decision can impact your retirement savings.
