Withdrawing From An RRSP? Get Ready For Partial Deregistration Fees

Owen Winkelmolen

Fee-for-service financial planner and founder of PlanEasy.ca

For those in the accumulation phase of their financial plan, withdrawals are not even on the radar yet, they’re entirely focused on contributions.

But for those getting close to retirement and the decumulation phase, their mindset starts to shift from contributions to withdrawals. They’ve been adding to these accounts for so long that they’re probably now wondering “how do I get my money out?”.

One unexpected realization people often have as they enter the decumulation phase is that it costs money to withdraw from an RRSP, sometimes a lot of money.

That’s right, withdrawing from an RRSP costs money. There is typically a fee charged on every RRSP withdrawal. These RRSP withdrawal fees are called “partial deregistration fees” and they can range anywhere from $50 to $100+ depending on the financial institution.

Finding out about these partial deregistration fees is a shock for those entering early retirement and for those who aren’t aware that these fees exist… or how to avoid them.

 

 

What Are RRSP Partial Deregistration Fees?

RRSP stands for Registered Retirement Savings Plan and whenever you withdraw from an RRSP there is usually a fee. This fee is called a “partial deregistration fee” and it gets charged whenever someone withdrawals from an RRSP.

This fee is on top of the withholding tax that the financial institution withholds when you make an RRSP withdrawal.

Unlike the withholding tax, which is just a prepayment of income tax and gets credited towards your income tax owing at the end of the year, the partial deregistration fee is paid to the financial institution and is not recoverable.

Presumably this fee is to cover the extra administrative work of reporting the withdrawal to the CRA? And yet, TFSA withdrawals also need to be reported to the CRA and typically do NOT have deregistration fees.

So why is there a partial deregistration fee for RRSP withdrawals? Likely just another way to make money for the financial institution.

 

 

When Do You Pay RRSP Partial Deregistration Fees?

The RRSP partial deregistration fee gets paid on every RRSP withdrawal. This is an important consideration especially for early retirees who will start withdrawals from their RRSP early.

This fee is paid on each and every RRSP withdrawal, so it’s important to consider how frequently you’ll withdraw from your RRSP in early retirement.

Sometimes it can be attractive to make multiple small RRSP withdrawals to avoid higher withholding tax rates. Although RRSP withholding tax is just a prepayment of income tax, and not a penalty for withdrawing early, some people have a strong desire to avoid the higher withholding tax rates.

The withholding tax is 10% on withdrawals up to $5,000, 20% on withdrawals between $5,000 and $15,000, and 30% for larger withdrawals over $15,000. To avoid these higher withholding tax rates, people sometimes irrationally plan multiple smaller $5,000 withdrawals, but what they’ll quickly realize is that making multiple RRSP withdrawals will trigger multiple partial deregistration fees.

Because you’ll pay a partial deregistration fee on every RRSP withdrawal it can sometimes make sense to make fewer withdrawals during the year, so plan accordingly.

 

 

How Large Are RRSP Partial Deregistration Fees?

How large are RRSP partial deregistration fees? The amount that is charged for a partial RRSP deregistration will vary depending on the financial institution. It will typically range from $50 to $100+ per withdrawal, but can be much lower or sometimes much higher, so check with your financial institution before making a withdrawal.

If you plan to make a quarterly withdrawal to support early retirement spending, you could pay $200 to $400+ per year in withdrawal fees!

For couples this is double! To split income tax effectively before age 65 an early retirement couple might make equal sized RRSP withdrawals to effectively split income in early retirement. They might make withdrawals from either two personal RRSPs or perhaps a personal RRSP and a spousal-RRSP. This doubles the number of withdrawals each year and doubles the amount of fees. A couple could pay $400 to $800+ per year for RRSP partial deregistration fees if withdrawing quarterly or if withdrawing from multiple accounts! Is that in your early retirement budget?!?

 

A Few Examples of RRSP Partial Deregistration Fees:

 

 

 

How To Avoid RRSP Partial Deregistration Fees

If you’re not interested in paying $200 to $800+ to withdraw from your RRSP each year, there are a few options…

 

1. Make fewer withdrawals: Obviously making fewer withdrawals each year will lower the total fees paid. Consider making a semi-annual or annual withdrawal instead of quarterly or monthly.

2. Consolidate RRSP accounts: If you have multiple personal RRSP accounts then consolidating them into one account before retirement can help avoid the need to make multiple withdrawals each year.

3. Call and ask for a refund: Many financial institutions will refund RRSP partial deregistration fees for good clients if you ask.

4. Convert to a RRIF: Probably the best way to avoid RRSP partial deregistration fees in early retirement is to convert to a RRIF (or partially convert to a RRIF). Withdrawals from a RRIF are often free, or free for the first few withdrawals per year, or at least less expensive that RRSP withdrawals.

 

If you’re entering early retirement and will start making regular withdrawals from your investment accounts, then converting (or partially converting) to a RRIF might just be the easiest and best option to avoid or reduce RRSP partial deregistration fees. But, converting to a RRIF will trigger mandatory minimum RRIF withdrawals each year, so make sure this is part of your retirement income plan.

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Owen Winkelmolen

Financial planner, personal finance geek and founder of PlanEasy.

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

3 Comments

  1. Bob Wen

    Thanks for the info Owen.

    On a related topic, when should one pull their money out of stocks or bonds prior to withdrawing from the RRSP? For example, the start of the new year is just over two months away, and $40K is needed to cover next year’s expenses. When should the equity and bonds have been converted to cash? Last month, one year ago, perhaps five years ago, or even perhaps a week before the cash has to be in the expenses account?

    I gambled and left it until last week. My portfolio was down 2.6% from the month before, but it was still notably up on a year ago. I’m just wondering what your thoughts are.

    Reply
    • Owen

      That’s an interesting question Bob, and for many people it will depend somewhat on the investment option they’re using. Some investment options allow for systematic withdrawal plans, which can help automate the monthly withdrawals. This creates a steady stream of cash flow in retirement, avoids a lot of the timing considerations, and leaves money invested for as long as possible.

      For self-directed investors this typically isn’t an option and withdrawals must be set up manually. Doing semi-annual or quarterly withdrawals during the year allows money to be invested longer and reduces the effect of withdrawal timing, but increases the effort. Doing just one annual withdrawal reduces the effort, but means there is more cash sitting around and introduces more risk of withdrawal timing. There is no perfect answer.

      Having a fully funded emergency fund in retirement also allows for withdrawals to be delayed a few months, this can be especially helpful during periods like March 2020 which saw a quick decrease in investment values followed by a quick recovery.

      Reply
  2. Bob Wen

    Thank you Owen for outlining the options. Your comment “There is no perfect answer” really helped, because that’s exactly what I’ve been trying to calculate/spreadsheet out. Now I know, I can relax a little.

    Reply

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