Todays FAQ was about rsp deductions and the impact of taxes.
I need your expertise to help me understand how RRSP withdrawals & taxes held back by the government work.
The government website indicates that anyone withdrawing RRSP's over $15000.00 is required to pay a 30% holding tax to the government. How is this tax calculated at the time of withdrawal? i.e. $30,000.00. What would the taxes withheld by the government be on that amount?
When given the figures something didn't sit right with me. Want to make sure prior to signing anything."
For RSP withdrawals. The government mandates that taxes be withheld at source. The amount ( percentage) depends on the total gross withdrawn.
For amounts over 15,000, 30% is deducted and sent to CRA and you receive the net amount.
For your example of $30,000 , 30,000 X 30% = 9000 tax , net to you is 21,000.
The 30,000 becomes taxable income in the year you do the withdrawal. So if your doing this now, it would be year 2023. You will then be taxed for your total income in the year and what we call a marginal tax rate would kick in. You will receive a T4RSP tax slip for year 2023 next year usually by end of Feb 2024. Depending on your taxable income you may or may not owe additional taxes. You get credit for the withheld taxes.
I did a quick example, let’s say your income was 30,000 and all the taxes had been paid up. Your income would now be 60,000 and you would get a refund of 1580. If your income was 60,000 before the RSP income you would owe 186
So the withholding tax kind-a protects you from owing a large amount next tax time.
The next thing to consider, is sometimes people want to have a certain amount of money , so let’s say you want 30,000 to be deposited into your account. The RSP issuer would have to redeem 30,000/(1-.3) = 42857.14 , net (42857.14 * 30% = 12857.14 in taxes, ( 42857.14-12857.14) = 29999.998 =30,000 deposit.
In this case, let’s say the income is 60,000, this brings taxable income to 102857 and amount of tax owing = 1014
If your income was 30,000 pre rsp, then your refund = 1475
Hope that helps you in your decision making process.
We provide a family office service at my firm, so we can give guidance on all these matters. Perhaps we can be of service for your future tax and investment needs.
"Thank you so much Tim.
Your explanation is excellent. It really helped me better understand the calculations behind RSP withdrawals & the taxes that are withheld.
Really appreciate that our friend sent me in the right direction.
Thank you for offering your services. Will certainly keep that in mind.
Sincere gratitude & appreciation"
RSRP withdrawals up to 5000, the withholding tax is 10% = 500 on 5000, so you net 4500 ( 20% in Quebec)
Between 5001 to 15,000, the withholding tax is 20% son let's say a 10,000 request woudl be 2000 deducted, yo net 8000 ( 25% in Quebec)
If you wanted 10,000 deposited in yoru account 10,000 / (1-.2) = 12500 total reemption required ( 12500 * 20%=2500, net 12500-2500=10,000
With smaller amounts , depending on your income , you are m,ore likely to owe taxes due to teh marginal tax calculations, expecially if you have a mid to larger income. If your income is lower, not so much.
Hope that FAQ is helpful. If you have a question, please email me at firstname.lastname@example.org and will see if we can do up a good FAQ article for you.
Have a blessed day !
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Brock Shores Financial, Family Office providing Omega Stewardship ©
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