Can you transfer a RRIF to a TFSA—and what are the tax implications?

Can you transfer a RRIF to a TFSA?

A RRIF is a tax-deferred account. A TFSA is a tax-free account. So, you cannot do a direct transfer between the two without the RRIF withdrawal being taxable.

You can take a RRIF withdrawal and deposit the after-tax proceeds to your TFSA, Soheir. If your withdrawal constitutes your minimum withdrawal for the year, there is no mandatory tax withholding, although you can request voluntary withholding tax.

If your withdrawal is in excess of the minimum, there will be withholding tax. The tax rate depends on the magnitude of the withdrawal: a rate of 10% applies to excess withdrawals of up to $5,000, a rate of 20% to excess withdrawals from $5,000 to $15,000, and a rate of 30% to excess withdrawals of more than $15,000. (In Quebec, the rates are 5%, 10% and 15%, respectively.)

Tax return implications of transferring your RRIF

Withholding tax is just the start, though, Soheir. When you file your tax return, you report your income from all sources, including RRIF withdrawals, regardless of whether or not the withdrawals were transferred to a TFSA. TFSAs are tax-free once your deposit is made, but the contributions themselves have no bearing on your tax return.

If your withholding tax rate on your RRIF withdrawal was too high or too low, it may lead to a refund or a balance owing. So, the withholding tax is just a short-term tax implication; the actual tax is calculated on your tax return for the year.

There may generally be an advantage to taking more than the minimum RRIF withdrawals, whether you contribute the excess to your TFSA or not, Soheir.

For example, let’s say you are in a low tax bracket early in retirement and you are deferring pension income like Canada Pension Plan (CPP), Old Age Security (OAS) or workplace pensions. Taking extra withdrawals may take advantage of your low tax brackets, smooth your income in retirement, and allow you to contribute to or maintain your TFSA.

Another example might be if you are married or common-law and your partner’s health is not good. RRIF withdrawals can be split with your spouse and reported on two tax returns, typically at a lower rate. That opportunity no longer exists after the first death in the couple. All future income is taxed on just one tax return.

Likewise, if you are single and your health is not good, it may make sense to take larger withdrawals now at low tax brackets, because your RRIF is fully taxable on your death. Doing so could increase your estate’s after-tax value for your beneficiaries.

Final thoughts on RRIF-to-TFSA transfers

In summary, Soheir, you cannot transfer a RRIF withdrawal directly to your TFSA. However, you can deposit the after-tax proceeds of the withdrawal into the account.  

The withholding tax will not be your final tax obligation, as the withdrawal will be reported on your tax return and the tax will be calculated accordingly at that time. TFSAs are great for saving future tax on investment income and withdrawals, but making TFSA contributions has no bearing on your tax return.

Read more about RRIFs:

• Should you max out your RRSP before converting it to a RRIF?
• RRIF withdrawals: What should seniors with million-dollar portfolios do?
• How to make the most of your TFSAs in retirement
• How to model retirement income in Canada

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

Linkedin Twitter Facebook Website