RRSPs are a go-to savings tool for Canadians planning retirement, but using them the wrong way can land you in hot water with the CRA. As more retirees continue to work part-time or manage complex portfolios, the risks tied to RRSP withdrawals are growing.
Whether you’re already retired or nearing it, here are three big CRA red flags you need to watch out for when taking money out of your RRSP.
Table of Contents
Working
The first big red flag? Withdrawing from your RRSP while you’re still earning income.
RRSP withdrawals are considered taxable income in the year you take them. So, if you’re working—even part-time—those withdrawals could bump you into a higher tax bracket.
Here’s what that can lead to:
- More tax withheld at the time of withdrawal
- A higher marginal tax rate overall
- Less money in your pocket after taxes
If you can wait until you fully retire, you’ll likely pay less in taxes. Delaying big withdrawals can help your RRSP savings last longer.
Limits
Another major risk? Over-contributing to your RRSP. Many people don’t realize how easy it is to cross the line.
For 2025, the max you can contribute is:
- 18% of your earned income from 2024,
- Capped at $32,490
You do have a $2,000 lifetime cushion, but anything above that is taxed at 1% per month until it’s removed.
Here’s where it gets tricky: spousal RRSPs and employer-matching plans can push you over without you noticing. Always check your latest Notice of Assessment or log into your CRA My Account before contributing.
Investments
Not every investment is RRSP-friendly. Holding the wrong type of asset in your account can lead to penalties or worse—loss of your RRSP’s tax-sheltered status.
Avoid putting these in your RRSP:
- Shares of private, foreign companies
- Direct real estate holdings
- Certain derivatives or high-risk instruments
Stick to what the CRA calls “qualified investments”—things like Canadian-listed stocks, ETFs, mutual funds, and government bonds. If you’re not sure about a particular asset, speak to a financial advisor or double-check CRA guidelines.
Summary
Here’s a quick glance at the key red flags and their risks:
| Red Flag | Risk/Consequence | What Triggers It |
|---|---|---|
| Withdrawing While Working | Higher tax bracket and reduced benefit | Taking RRSP money while still earning income |
| Over-Contribution | 1% monthly tax on excess over $2,000 | Exceeding your RRSP limit |
| Unauthorized Investments | Loss of RRSP status and tax penalties | Holding non-qualified assets in your RRSP |
Tips
Want to avoid a CRA audit or costly penalties? Follow these simple tips:
1. Withdraw with timing
Don’t take money out while still working, if possible. Large lump-sum withdrawals can also trigger higher taxes, so spreading them out might help.
2. Monitor your contribution room
Use CRA My Account or your latest Notice of Assessment to track your RRSP limit each year. Remember: spousal contributions also count against your total.
3. Stick to approved investments
If you’re unsure about an investment, stick with ETFs, mutual funds, bonds, or Canadian-listed stocks. Avoid private assets or anything outside the CRA’s approved list.
Withholding
Here’s how much tax your financial institution will withhold when you withdraw:
| Withdrawal Amount | Withholding Tax Rate |
|---|---|
| Up to $5,000 | 10% (Quebec: 19%) |
| $5,001 – $15,000 | 20% (Quebec: 24%) |
| Over $15,000 | 30% (Quebec: 29%) |
Note: This is just a preliminary deduction. When you file your taxes, your actual tax owed might be more—or you might get a refund—depending on your total income for the year.
RRSPs are still one of the best retirement tools in Canada, but they’re not foolproof. By managing your contributions, withdrawals, and investment choices wisely, you can stay on the CRA’s good side and get the most out of your savings.