By Allan Norman, MSc, CFP, CIM on January 13, 2025
Estimated reading time: 6 minutes

Moving money from RRSPs, RRIFs and TFSAs in retirement

By Allan Norman, MSc, CFP, CIM on January 13, 2025
Estimated reading time: 6 minutes

To have liquidity and reduce taxes, Canadians can move money between registered accounts. But what are the tax, contribution room and other implications?

Canadian couple sitting together, wondering about moving money from RRSPs, RRIFs and TFSAs in retirement

Photo by Yan Krukau from Pexels

Ask MoneySense

My husband and I are retired with $200,000 in our TFSAs, $230,000 in our RRSPs and RRIFs, and we have an emergency fund. Our household income is $85,000 a year.

My husband may need nursing home care at some point, so I have been moving assets from the RRSPs to our TFSAs for flexibility. My spouse, who is over age 71, has about $50,000 of RRSP contribution room left.

We would like to leave money to our only child and may soon open a non-registered investment account.

Should I move TFSA and other assets into a spousal RRSP before I turn 71, and continue to draw down our RIFs/RRSPs to our TFSAs? Or should I leave things be? 

—Irene 

Moving money from RRSPs and RRIFs to TFSAs

I like your thinking, Irene. You’re looking ahead to see how you can minimize taxes and create more options for you and your husband. Money withdrawn from a registered retirement savings plan (RRSP) and/or a registered retirement income fund (RRIF) is taxable, so why not move it to a tax-free savings account (TFSA)? That can mean tax-free growth and withdrawals.

You are also wondering if there is a way to use your husband’s unused RRSP contribution room. As we work through these points, I think you will come up with a strategy that will work for you.

Rankings

Compare the best TFSA rates in Canada

see rates

Withdrawing from RRIFs and RRSPs in retirement

Let’s step back and look at the bigger picture, before focusing on a strategy for your registered accounts. You have an annual household income of $85,000, which I’m assuming is a pre-tax figure. If your combined Canada Pension Plan (CPP) and Old Age Security (OAS) is about $40,000 annually, indexed to inflation, you will need another $45,000 from your investments to bring you to the $85,000 income figure.

Drawing $45,000 from your RRSPs and RRIFs will deplete it in about seven years. Does that match with your plans? If your projections are showing that you will naturally deplete your RRIF over your lifetime, then it probably doesn’t make sense to draw it down faster, pay tax and add it to a TFSA.

From a tax perspective drawing $45,000 from your RRSPs and RRIFs is OK. If you’re in Ontario and are perfectly dividing your income through pension splitting and CPP sharing, then you will each have a marginal tax rate of 20% and an average tax rate of 9.4%.

That is not bad. At that income level, you are also under the individual income threshold of $44,325 (2024) when tax saved from the old age credit starts to reduce.

Withdrawing from registered accounts

When withdrawing from RRSPs and RRIFs to add to TFSAs, you must think about the tax consequences.

A RRIF withdrawal means you have less after-tax money to invest in a TFSA. If the rate of return earned in the RRIFs and TFSAs are the same, and your marginal tax rate remains, there should be no difference when the money is withdrawn. It may be that there’s no value in moving from an RRSP or RRIF to a TFSA. It may make sense if you’re looking to create alternative sources of income, as you are, or if you are going to carry a lot of RRIF money to your estate, which it doesn’t appear you’re doing.

Another reason for not drawing from your RRSPs and RRIFs to top up a TFSA is that the first two accounts are both tax-sheltered.

Withdrawing money from a TFSA in retirement

With a TFSA, though, you can withdraw money and put it back in the next year. You cannot do that with a RRIF. Once you withdraw money from it, you can’t put it back in.

If you think you will need a tax sheltered account for a large sum of money in the not too distant future, for, say, a house sale or inheritance, it may be best not to use a RRIF to top up the TFSA.

Converting an RRSP to a RRIF at age 71

Have you converted your RRSP to a RRIF? If not, consider doing so. You will qualify for the $2,000 pension tax credit. Plus, which may be more important to you, you will be able to control the withholding tax on your minimum RRIF withdrawals. As a reminder, with RRSP withdrawals, the withholding tax on the first $5,000 is 10%, between $5,000 and $15,000 it is 20%, and over $15,000 it is 30%.

Converting your RRSP to a RRIF means no withholding tax on the minimum withdrawal after the first calendar year of opening the account, unless requested. I’ve heard it said that it doesn’t matter if the withholding taxes are high because you will get the money back in the form of a tax refund when you complete your taxes in the spring. But, having too much withholding tax means drawing more than needed from your RRSP investments, pushing up your average tax rate, and possibly losing some future investment growth.

You also wondered about drawing from your TFSA to make RRSP contributions. It sounds like a good idea because you get a tax deduction when you add money to a RRSP and you free up TFSA room, which you can use to absorb some of the proceeds from a home sale or inheritance.

But there is one issue.

Drawing $10,000 from a TFSA, adding it to a RRSP, and then withdrawing the money will leave you with $10,000 minus the tax.

You just turned $10,000 into a smaller amount. You may think that the RRSP tax refund will make it even, but it won’t. If your marginal tax rate is 20% and you make a $10,000 RRSP contribution, your tax refund will be $2,000. Sounds good, but how much did you have to earn before tax to have the original $10,000 to invest? Was it $12,000? No, because $12,000 minus 20% comes to $9,600. You had to earn $12,500 to have $10,000 to invest. So, if you don’t want to have less money when you go from a TFSA to an RRSP, you could use the $10,000, borrow $2,500 and when you get your tax deduction of $2,500 pay back the loan.

It may make sense to contribute other money to your RRSP, if you have it; however, you can’t contribute to a spousal RRSP for your husband. Even though your husband may not have used all of his RRSP contribution room, he is over the age of 71 and he’s not allowed to contribute any more, and that includes you contributing to a spousal RRSP for him.

Rankings

Compare the best RRSP rates in Canada

read now

Making money in retirement more tax efficient and more liquid

Irene, I think you have arranged things well. You have a good mix of TFSA and RRIF money. The RRIF money is for regular income, and the TFSA for health spending, and if it isn’t used for that it’s an ideal place to leave money for your child.

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

Linkedin Website