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Tax Consequences of Cashing in RRSP's

If your are thinking of cashing in lump sums of RRSP's think about the tax consequences which may not be apparent until the following year...

When you cash in lump sums of RRSP's, banks withhold about 10% or 1/10th of the funds up to about $10,000 and the withholding taxes increase based on the amounts being withdrawn from the RRSP. This means that many individuals will owe more money to the government in taxes by the time they add the income from the cashed in RRSP's to their income for tax purposes the following year.

For some people the additional income from the RRSP's can bump them into a higher income tax bracket. Most of us are not prepared for the tax consequences of cashing in RRSP's because we don't realize that we are going to owe additional funds to the government at tax time in the following year.

To be on the safe side I like to advise individuals to save at least another 10% of the withdrawn funds at least until tax time the following year. This way you will be prepared for the additional taxes that you will probably owe.

If you are in the highest tax bracket you may be looking at owing an additional 20% of the funds you cashed in from the RRSP's to pay for the tax consequences the following year of cashing in those funds.

Debts owed to Canada Customs and Revenue Agency start to accrue interest from April 30th of the year the taxes were to be filed. The interest rates are compounded which makes borrowing from Canada Customs and Revenue Agency one of the most expensive types of borrowing.

More tax tips:

www.netfile.gc.ca  -- to get your income tax refund faster, file your return over the Internet by visiting this website. You can now receive a NETFILE access code online.

File your income tax by telephone: call TELEFILE at 1-800-959-1110

What's my RRSP limit for this year?  Call T.I.P.S. at 1-800-267-6999

 

 

 

 

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