Facts

• Investors can contribute a certain portion of their prior year's taxable income and deduct these contributions from the current year's taxable income. Contributions are subject to annual maximums. You can withdraw funds from an RRSP at any time. The only limit is the value of your portfolio. For example, if you have contributed $5,000 Canadian this year, but your portfolio value is $10,000 Canadian, you can withdraw any amount up to $10,000 Canadian. You cannot withdraw funds from a locked-in RRSP, which is a tax-sheltered vehicle for transferring in pension funds from past employers.
  
  

Taxes

• The plan administrator deducts a withholding tax before transferring the withdrawal proceeds to you. As of the date of this publication, the withholding tax rates, except for Quebec residents, are 10 percent for amounts up to $5,000 Canadian; 20 percent for amounts greater than $5,000, but less than or equal to $10,000 Canadian; and 30 percent for amounts over $15,000. The withholding rates for Quebec taxpayers are half that of the other rates, but additional provincial withholding taxes apply.
  
  

Strategies

• To reduce the withholding taxes, you could break up the withdrawal amounts into under-$5,000 Canadian chunks. For example, if you want to withdraw $20,000, the plan administrator withholds 30 percent, or $6,000 Canadian, in taxes and transfers $14,000 to you -- $20,000 minus $6,000 -- assuming no other bank service charges. If you withdraw $5,000 Canadian four times, however, your withholding taxes would be 4 multiplied by $500 -- 10 percent of $5,000 -- or $2,000, which means you would receive $18,000 in proceeds -- $20,000 minus $2,000. Investment manager Preet Banerjee suggests on WhereDidAllMyMoneyGo.com that you space out your withdrawal requests or withdraw the funds from RRSP accounts at different financial institutions, because some plan administrators combine multiple requests and apply the withholding tax rate for the combined amount.
  
  It all evens out when you file your year-end taxes, however. Withdrawals count as income and the withheld taxes represent paid taxes. If you are in a low tax-bracket, you might get some of the withholding taxes back, but you might have to pay additional taxes if you are in a high tax-bracket.
  
  

Considerations: Tax-Free Savings Accounts

• The Tax-Free Savings Account allows unlimited withdrawals without any tax consequences. Unlike RRSPs, however, you cannot deduct TFSA contributions from your taxable income.