Transferring From RRSP to TFSA – Understanding The Penalties

WRITTEN BY Dan Kent | UPDATED ON: June 1, 2024

Transferring From RRSP to TFSA

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Overall, transferring funds from your Registered Retirement Savings Plan (RRSP) to a Tax-Free Savings Account (TFSA) is typically not advisable because of the tax penalties involved.

You should only do this if you’re of retirement age and have enough wealth that it makes sense to engage an investment professional to do some maneuvering for you. 

For everyone else, your best bet for financial stability is a combination of a comfortable emergency fund held in cash, plus some long-, and possibly middle-, and short-term investments, like mutual funds, ETFs, or GICs. If you have goals of financial independence maybe you will find yourself at home in the FIRE movement!

But carrying on, lets talk about transferring money from an RRSP to a TFSA.

How to Transfer Money From an RRSP to a TFSA

No brokerage will allow you to do in-kind transfers from your RRSP directly to your TFSA. There are ways you can get the money in your retirement account into your tax-free savings account, but it's more complex than initiating a transfer.

1. Eat the Fees

The most straightforward way to “transfer” funds from an RRSP account to a TFSA is to first take the money out of the registered account. It’ll land in your bank account of the financial institution connected to the account. And from there you can put it into the TFSA.

But you’ll have to pay an immediate withholding tax on that transaction. Here are the amounts:

  • Up to $5,000: 10% (5% in Quebec)
  • Between $5,001 and $15,000: 20% (10% in Quebec)
  • More than $15,000: 30% (15% in Quebec)

You’ll also permanently lose that contribution room. That’s why it’s not a good idea to withdraw from your RRSP until you’re retired, unless you’re taking advantage of the Home Buyers’ Plan or the Lifelong Learning Plan. More on those plans below.

That said, if you already have a financial advisor, it could be worth it to talk to them about your specific situation. 

One advisor from Atlantis Financial actually found that a 52-year-old who planned to spend $40,000 a year in retirement could pay less in taxes by taking money out of her RRSP and putting it into her own TFSA. 

Since the money would’ve accumulated more investment income through compound interest in the RRSP, the results didn’t lead to extra money in retirement. But she may have had some extra cash to leave to her kids or another beneficiary.

2. Do Some Self-Loan Finagling 

Precedence Capital devised a method to let you “transfer” money from your RRSP to TFSA. It involves liquidating your investments and then loaning yourself that money to invest it through a Mortgage Investment Corporation. 

It’s a fascinating play that would be difficult to pull off yourself. But if you have an investment advisor, it’s worth bringing up at your next meeting. At the very least, it’ll keep your advisor on their toes. 

How Does an RRSP Work?

You can contribute to your RRSP until the end of the calendar year in which you turn 71. After that point, you have to take the money out in a lump sum, purchase an annuity, or convert the RRSP into a Registered Retirement Income Fund (RRIF).

Your RRSP contribution limit is 18% of your earned income on your income tax return from the previous year, up to a maximum of $29,210 Canadian dollars in the 2022 tax year. Any unused contribution room is carried forward to future years.

You'll have to pay a tax of 1% per month on excess contributions, unless you withdraw them or if it was contributed to a qualifying group plan. 

It’s a good idea to start contributing to your RRSP early, as compound interest can work wonders as the account (and you) reach maturity. Also keep in mind whether you'll benefit from federal income programs like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). Read about both those programs here

When Should I Withdraw From My RRSP?

You can withdraw money from your RRSP at any time — there's no age limit. But the withdrawal amount will be subject to the taxes outlined above. The exceptions are if you withdraw funds under the Home Buyers’ Plan or the Lifelong Learning Plan. 

The Lifelong Learning Plan lets you withdraw up to $10,000 in a calendar year from your RRSP for full-time training or education for you or your spouse. 

The Home Buyers’ Plan lets first-time homebuyers (or those who have not lived in a home that they or their spouse owned in the last four years) to take out up to $35,000 from their RRSP to put toward buying a home.

When to Contribute to an RRSP vs. a TFSA

The best-case scenario is to fill up both your RRSP and TFSA contribution room every year. 

But if you can’t afford to spend the maximum amount, a solid guide is if you make more than $50,000 a year, you should contribute to your RRSP. If you make less, contribute to your TFSA. 

That’s because you only pay taxes on RRSP contributions when you take them out. So if you’re in a comparably low income bracket in retirement — when your house is paid off and your kids have moved out — you’ll essentially make some free money by withdrawing the cash then. It's like the Canada Revenue Agency (CRA) giving you a refund or a tax deduction or rebate way late.

And if you’re using the account to save up for a big purchase — that isn’t a first-time home purchase — like a car, a TFSA is the perfect investment vehicle (get it?).

That said, neither option is bad to contribute to, since both have better tax implications than keeping cash in a non-registered savings account. 

Can you Transfer From a TFSA to an RRSP?

Just like the reverse, there’s no direct way to initiate a transfer request from a TFSA to an RRSP. But you can take money out of your TFSA and put it into an RRSP — and it might actually make sense to do this. 

Allan Norman of Atlantis Financial has laid out the potential cases here. Basically, if you think you’ll be in a lower income bracket in retirement, it could be a good idea. That’s because TFSA contributions are after-tax — you’ve already paid tax on that money — while RRSP contributions are before-tax — you’ll pay taxes on it when you take it out.