Withdraw RRSP before retirement

Saw this good article from Invest Ripple, a social network for investors. Repost some contents here. Hopefully it's helpful for some members here.

Source: http://www.investripple.com

Do you know there are two types of tax if you withdraw RRSP before retirement?

1. Withholding tax
Because you didn't pay tax for the amount of income contributed to RRSP, a withholding tax will be charged when you withdraw from your RRSP before retirement. For residents of provinces other than Quebec, the withholding tax is 10% for withdraw < $5000, 20% for withdraw between $5000 to $15000, 30% for withdraw > $15000. For example, if you withdraw $10,000, you will only get $8,000 after the withholding tax is charged. For non-residence, the withholding tax is 25%. The federal withholding tax for Quebec residents for the above brackets are 5%, 10% and 15% respectively. Although the rates seem lower in Quebec, there will be extra provincial withholding tax in Quebec.

2. Income tax
Besides the withholding tax, you will need to pay income tax when reporting the amount of RRSP you withdraw.

Furthermore, you will lose the contribution room for the amount you withdraw forever.

So if you want to withdraw money from your RRSP to cover an emergency cost or fund your business or something else requires cash flow, think twice. A line of credit may be a cheaper choice.

There are two ways to borrow money from your RRSP for free.

1. Home Buyer's Plan (HBP). You can borrow up to $25,000 from your RRSP to buy your first home. You will need to pay it back in 15 years.

2. Lifelong Learning Plan (LLP). You can borrow up to $20,000 (max $10,000 each year) to pay for full-time education. You need to pay back in 10 years. After you bring your LLP balance to 0, you can withdraw up to $20,000 again if you are eligible.