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.

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.