Are you looking for the best way to transfer your RRSP to TFSA without penalty? Unfortunately, I have some bad news for you.
You cannot transfer RRSP funds into a TFSA without being subject to standard RRSP withholding taxes, which could be viewed as a penalty.
While you can’t transfer your RRSP to a TFSA, there are other types of accounts you can transfer your RRSP into penalty-free.
Below, I’ll outline which accounts you can transfer your RRSP into without penalty and show you two other circumstances that allow you to withdraw your RRSP funds penalty-free.
A Registered Retirement Savings Plan (RRSP) cannot be directly transferred to a Tax-Free Savings Account (TFSA). While it is possible to move your money from an RRSP into a TFSA, the funds in the RRSP must be formally withdrawn, meaning they’re subject to any applicable tax penalties.
RRSPs are designed to help Canadians retire comfortably. To discourage people from dipping into their RRSPs early (which could negatively affect their retirement plans), the CRA imposes tax penalties on individuals who make withdrawals.
Since RRSP contributions are also tax-deductible, the CRA wants to make sure that people aren’t using them to evade taxes only to withdraw the funds after filing their tax returns.
These penalties are imposed on all cash withdrawals from an RRSP, as well as when RRSP funds are withdrawn and transferred into savings accounts, chequing accounts, TFSAs, and many other types of spending/investing accounts.
The withholding taxes for withdrawing from your RRSP before retirement are based on the amount withdrawn and are as follows:
- 10% on amounts up to $5,000
- 20% on amounts between $5,000 and $15,000
- 30% on amounts over $15,000
So, if you wanted to withdraw between $5,000 and $15,000 to transfer it into a TFSA, you’d have to pay a 20% tax on the withdrawal, which is quite hefty. The financial institution holding your RRSP would immediately withhold the funds upon withdrawal as well.
Quebec has a separate tax system and imposes lower tax rates for early withdrawals:
- 5% on amounts up to $5,000
- 10% on amounts between $5,000 and $15,000
- 15% on amounts over $15,000
While Quebec’s withholding taxes are only half of those imposed in the rest of Canada, they’re still higher than most would rather pay.
Note that sometimes the amount of tax that was deducted may not fully cover the tax owed based on your tax bracket. In such cases, it may be necessary to pay additional tax on the withdrawal when reporting it on your income tax and benefit return for that particular year.
You should expect withholding taxes when you withdraw funds from your RRSP, whether you’re withdrawing cash or intend to transfer the funds to a personal savings account.
However, two exceptions allow you to withdraw or transfer funds from your RRSP without penalty.
- Lifelong Learning Plan (LLP): Allows Canadians to withdraw up to $10,000 per year (maximum $20,000 total) from their RRSPs penalty-free to finance full-time education or training for themselves or their spouse/common-law partner. The withdrawn amount must be repaid to the RRSP within 10 years, with repayments starting no later than the fifth year after the first withdrawal.
- Home Buyers’ Plan (HBP): Allows eligible first-time homebuyers to withdraw up to $35,000 penalty-free from their RRSPs to make a down payment on a qualifying home. The amount withdrawn must be repaid to the RRSP over 15 years, with repayments beginning the second year after withdrawal.
The government has implemented these programs to make post-secondary education and homeownership more accessible to Canadians. However, the stipulation is that the funds must be repaid back into your RRSP within a certain time period.
These plans are similar to borrowing from your whole life insurance policy’s cash value. The only difference is that you don’t have to pay interest on the amount borrowed from your RRSP.
So, you can’t transfer your RRSP to other registered accounts without incurring a penalty. However, there are several other types of registered accounts that you can transfer your RRSP into penalty-free.
The funds within your RRSP must be transferred into a Registered Retirement Investment Fund (RRIF) by the end of the calendar year that you turn 71. RRIFs are very similar to RRSPs, except they have annual withdrawal minimums.
The withdrawal minimum starts at 5% per year at age 71 and gradually increases to a minimum withdrawal of 20% for individuals who are age 95 or older.
Since RRSP holders are legally required to convert their RRSP to an RRIF by age 71 (although it can be anytime between age 65 and 71), they don’t have to worry about any tax penalties.
If you’re unhappy with the way that your current financial institution is handling your RRSP, you can transfer the funds to an RRSP at another bank any time you wish. Since the money is being transferred directly to the new RRSP, no tax penalties are imposed.
- Related Reading: 10 Best RRSPs In Canada
If you leave an employer where you participated in a group RRSP, you can withdraw the funds from your group RRSP and pay the applicable penalties. If you don’t want to be subject to penalties, though, you’ll have three options:
- Leave the funds there to grow
- Transfer the funds to a personal RRSP
- Transfer the funds to a new group RRSP with a different employer
RRSP and TFSA accounts are similar in that they can be used as investment vehicles, allowing your funds to grow tax-advantaged in a CRA-registered account. Each year, the federal government typically increases the annual contribution limit for both TFSAs and RRSPs.
However, this is pretty much where the similarities end.
RRSPs are like a type of pension plan that allows people to begin investing and saving for their retirement. Contributions are tax-deductible, and you won’t have to pay taxes on your RRSP until you begin making withdrawals after retirement.
Unless you’re withdrawing from your RRSP to pay for college or purchase your first home, any other early withdrawals from your RRSP are subject to immediate withholding taxes.
By contrast, TFSAs offer far more flexibility. Although contributions are made post-tax, any profits realized within a TFSA are tax-free. TFSA funds can also be withdrawn at any time without tax penalty.
Here’s a quick table outlining the key differences between the two types of registered savings accounts:
|Pension plan designed to help Canadians save for retirement||Can be used to save for retirement but don’t have the same restrictions|
|Contributions are tax-deductible||Contributions are made after-tax|
|Withholding taxes imposed if withdrawals are made before retirement (unless for education or first home down payment)||Funds can be withdrawn any time without tax penalties|
|Higher annual contribution limit||Lower annual contribution limit|
The majority of RRSP withdrawals and account transfers are subject to an immediate withholding tax. Unfortunately, this is also true for those who want to transfer funds from an RRSP into a TFSA.
Looking for more places to invest your money? Keep reading to see my list of the best investment accounts in Canada!