You certainly can transfer stocks and other investments from your RRSP to a TFSA. However, there may be tax implications. So, the big question: Is it a good idea?
Also in this post, learn how easy it is to transfer your RRSP to a new financial institution.
What is a Registered Retirement Savings Plan (RRSP)?
A Registered Retirement Savings Plan is a program authorized by the Canadian government to encourage people to save for retirement. When you contribute to your RRSP, you receive a tax deduction that reduces your tax owing.
By holding investments in an RRSP, the interest and capital gains accumulate tax free. You only pay tax if you decide to withdraw some or all of the funds. If you make withdrawal, the government imposes a withholding tax. The size varies depending on how much you take out. For a withdrawal of less than $5,000, the withholding is 10 percent; for up to $15,000 it is 20 percent; for anything above that, the withholding is 30 percent.
What is a Tax Free Savings Account (TFSA)?
The Tax Free Savings Account is also an investment vehicle, but it operates somewhat differently than an RRSP. Let’s say you put $5,000 from your bank account into a TFSA. Unlike an RRSP, you don’t get a tax deduction. However, your investment can grow tax free within your TFSA account.
A few years later, suppose your TFSA is now worth $8,000. You decide you want to go on a trip to Hawaii with your spouse. You withdraw $7,000 to cover the cost. The good news: There is no tax withholding on this withdrawal and you don’t have to report this amount on your income tax return.
Can you transfer an RRSP to a TFSA?
Yes, you can convert your RRSP into a TFSA. However, the process is a bit complicated and there may be tax implications. Here’s how it works:
- You withdraw investments from your RRSP. This will trigger a withholding tax, as we mentioned above. Your financial institution may also levy a charge called a “deregistration fee”, which could cost you $25 or $50.
- You place the investments in a non-registered account.
- You transfer the shares from the non-registered account to your TFSA
Can you transfer an RRSP to TFSA without penalty?
As we mentioned above, there is a “withholding tax” when you move investments from an RRSP to a TFSA. However, this does not mean that you will end up paying tax. You must report the withdrawal as income on your tax return. If your income is very low, you may get a refund of the withholding tax when you file your return.
Let’s look at an example: Bob decides he wants to transfer $5,000 from his RRSP to his TFSA. When he makes an RRSP withdrawal, there is a withholding tax of $500 (10 percent of the withdrawal). However, Bob is taking a year off from work to relax and has no income.
Bob files his income tax, reporting his $5,000 of RRSP income. Since he has a number of deductions, his net income is zero. As a result, he receives a refund of the $500 withholding tax. He can then decide whether to pocket the cash or put in his TFSA. If he does the latter, his TFSA will now hold the entire $5,000 that he transferred from his RRSP.
So is there a “penalty” on moving an RRSP to TFSA? It really depends on your overall income and whether you end up getting hit by a tax.
Can you move an RRSP to another bank?
Absolutely. You may feel that your financial institution charges fees that are too high. Or perhaps you are unhappy with the advice that your current financial advisor is providing. Or maybe you want to shift to a low-cost robo-adviser.
Whatever the reason, it’s fairly simple to move your RRSP to another financial institution, investment dealer or discount brokerage.
Here are the steps that you should take:
- Open a new RRSP account at another financial institution.
- Fill out the paperwork and request a transfer from your old financial institution to the new one
- You have the option to transfer the funds “in kind” or in cash. In kind simply means that you keep the same investments and simply move them to the new institution.
- Initiate the transfer
It’s important to follow these steps. If you simply withdraw the funds from your existing RRSP, you will face a withholding tax.
Of course, your old financial institution may be unhappy. But there’s not much they can do. They may try to charge you a fee, but you can dispute this. If they insist, you can ask your new financial institution to cover it. They will appreciate your new business and will likely do so.
It may take a couple of days for your investments to be transferred to your new account.
Can you transfer your RRSP to your TFSA?
Technically, you can move an RRSP to a TFSA. However, you will trigger a tax withholding so this may not be advisable. Check with your financial advisor about different options.
