Can you reduce the amount of tax withheld on RRSP withdrawals? | Income tax filing | Discussion forum

Also, the 20% tax withheld on the RRSP withdrawal doesn't seem to be that far off of the actual income tax.

Person had withdrawn $12,000 from RRSP. Including that withdrawal, income for the year is $30,500.

Person's provincial tax bracket is 5.06%. Federal tax bracket is 15%. Combined is 5.06% + 15% = 20.06%.

According to Question #7 of CRA: Frequently asked questions (RRSPs/RRIFs), CRA expects the tax withholding rate to be based on each individual RRSP or RRIF withdrawal, unless the withdrawals are part of a single request or the annuitant appears to be making separate requests to avoid a higher withholding rate:

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In a situation where an annuitant receives monthly [RRIF] instalment payments and submits a request for an additional amount during the year, the CRA views this as a separate request and only requires withholding on the excess portion of that specific payment regardless of the amount of the ongoing instalment payments. However, where it appears that an annuitant is making separate requests in order to minimize the income tax withheld, for example, where a series of requests are made in a short period of time, it is our position that the withholding rate should be determined as if there was one request equal to the total of all amounts requested. Thus, a higher withholding rate could apply. We suggest payers use their discretion since it is sometimes difficult to apply these rules in these situations.
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GICinvestor said
So for $12,000 is there a tax savings? Yes, sort of, take 3 withdrawals; $5000, $5000, and $2000. For a 10% hold back.
 

I tried that in AcceleRate Financial, didn't worked. First withdrawal $5000. Second $4000 withdrawal 2 weeks later - full 20% for all $9000 ($500 hold back from $5000 and $1300 from $4000).

GICinvestor said
No I am not trying to avoid any thing.

But the multiple withdrawal from RRIF I saw being done by my mother in laws advisor.  

I'm curious, was she being charged a separate fee per withdrawal or were they all free?

Here is how I understand the reason for allowing a reduction in RIF mandatory withdrawals:

The mandatory withdrawal is based on the balance as of Dec 31 of previous year. Thus, if you had 400K as of last year end and your withdrawal rate is now 5%, you would be required to withdraw 20,000.

If your investments have tanked since Jan 1, your RIF might now only be worth 300K (as an example).

If you must take out 20K, that leaves you with 280,000.
This new starting point of 280K will make it a bigger challenge for you to build up your nest egg again in future if you are actually depending on your RIF to meet your needs. It could extend the life of your RIF and thus make you less likely to need support from the government support programmes down the road.

With this change that the gov't has put forward, you might only need to withdraw 15K, leaving you with more potential for gains when/if the economy rebounds.

It will probably legitimately benefit some people, but the ones who can afford to have less income this year from their RIF will be those who don't really need a break from the government. They will be the people for whom tat extra 5K (or whatever) is not needed for annual expenditures.

For me personally, it is of no use. We normally top up our tax bracket with additional RIF withdrawals anyway, so have no need for less. Our goal is to deplete, not to extend, the RIFs as soon as reasonably possible in terms of tax efficiency, although this is becoming more difficult every year!

I am curious what they will do about those whose annual mandatory withdrawal occurred early in the year though. Can their money somehow get re-deposited to the RIF?