Tax-Efficient Strategies for Moving RRSPs and RRIFs to TFSAs – Advice from Bill Craven

by Bill Craven BA, CFP, EPC

Understanding RRSPs, RRIFs, and TFSAs in Ontario Retirement Planning

For many Ontarians, a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), and Tax-Free Savings Account (TFSA) are the foundation of a well-structured retirement plan. Each of these accounts serves a its own purpose, offering tax advantages that can help maximize your savings and retirement income.

Overview of RRSPs & RRIFs

Understanding TFSAs and Non-Registered Accounts

While these accounts each offer significant benefits, many people in Ontario find themselves reevaluating their strategies as they transition into retirement. Some of the most common reasons for transferring funds from an RRSP or RRIF into a TFSA or a non-registered account include:

• Reducing tax liability: RRIF withdrawals are fully taxable, while TFSA withdrawals are tax-free, making strategic transfers appealing.
• Minimizing mandatory withdrawals: Some retirees seek ways to control their taxable income by shifting assets strategically.
• Estate planning advantages: Transferring funds into a TFSA can provide a tax-efficient way to pass on wealth to beneficiaries.

Whether you are looking to reduce your overall tax burden, enhance your retirement income, or plan your estate effectively, understanding the best way to migrate funds between these accounts is key.

Reasons to Consider Transferring Funds

Retirement planning isn’t just about saving—it’s also about managing your money efficiently when you start withdrawing funds. Many Ontarians consider transferring RRSP and RRIF funds into a TFSA or non-registered account for three main reasons: reducing future tax liability, managing mandatory RRIF withdrawals, and simplifying estate planning. Let’s break down how these strategies can work to your advantage.

Reducing Future Tax Liability

One of the most compelling reasons for transferring funds is minimizing long-term taxes. Withdrawals from RRSPs and RRIFs are fully taxable as income, which means they can push retirees into a higher tax bracket. By strategically withdrawing funds from an RRSP or RRIF before you’re required to and reinvesting them in a TFSA, you can continue growing your savings while keeping future taxable income lower.

For example, a retiree in Chatham, ON, who expects their RRIF withdrawals to exceed their spending needs could gradually withdraw funds before age 71, pay a lower tax rate today, and move the money into a TFSA. This way, they avoid larger withdrawals in later years that could trigger Old Age Security (OAS) claw backs or higher marginal tax rates.

Key Takeaway:

✅ Withdraw funds gradually before they become mandatory.
✅ Move excess funds into a TFSA for tax-free growth and withdrawals later.
✅ Reduce the risk of OAS claw backs and high marginal tax rates.

Managing Mandatory RRIF Withdrawals

At age 71, RRSPs must be converted into a RRIF, and minimum withdrawals become mandatory. The problem? These withdrawals may be larger than what you actually need, leading to unnecessary taxation and reducing the longevity of your savings.

A solution is to reinvest a portion of RRIF withdrawals into a TFSA. Since TFSA withdrawals are tax-free, this gives retirees more flexibility with their income in later years.

Example:

Sarah, a retiree in London, ON, is required to withdraw $30,000 from her RRIF each year, but she only needs $20,000 for expenses. Instead of keeping the extra $10,000 in a taxable investment, she moves it into her TFSA, where it continues to grow tax-free.

Key Takeaway:

✅ If RRIF withdrawals exceed your spending needs, shift excess funds to a TFSA.
✅ Avoid paying unnecessary tax by managing withdrawals proactively.

Estate and Legacy Planning Considerations

Without proper planning, RRSPs and RRIFs can become fully taxable upon death, with the remaining balance added to the deceased’s final tax return as income. This can result in a hefty tax bill, leaving less for beneficiaries.

By transferring funds to a TFSA or non-registered account over time, retirees can reduce the taxable estate and provide a more tax-efficient inheritance. Unlike an RRSP or RRIF, a TFSA can be passed to a spouse tax-free, preserving its full value.

Example:

John, a retiree in Sarnia, ON, has $300,000 in his RRIF. If he were to pass away suddenly, his estate could face taxes of 40% or more on those funds. However, by gradually withdrawing smaller amounts each year and moving them into a TFSA, he significantly lowers the final tax bill for his heirs.

Key Takeaway:

✅ Reduce estate taxes by shifting funds gradually to a TFSA.
✅ TFSAs allow for tax-free inheritance when passed to a spouse.

Transferring funds between retirement accounts isn’t a one-size-fits-all strategy. It requires careful planning based on your income, tax bracket, and long-term financial goals. Whether you’re looking to lower your tax burden, optimize withdrawals, or plan your estate efficiently, understanding these options can help you preserve more of your wealth for yourself and your loved ones.

RRIF to Non-Registered Account Transfers: Capital Gains & Taxation

When RRIF withdrawals are not needed for expenses, some retirees invest the funds in a non-registered account. However, doing so comes with its own tax implications, particularly for capital gains, interest income, and dividends.

Understanding Taxation on Non-Registered Investments

 Practical Tax-Minimization Strategies

• Prioritize dividend-paying Canadian stocks for tax-efficient investment income.
• Invest in capital gain-generating assets since only 50% of the gain is taxed.
• Consider a spousal investment strategy to split investment income and lower the tax burden.

Transferring funds between RRSPs, RRIFs, TFSAs, and non-registered accounts requires careful tax planning. By strategically managing withdrawals, timing RRSP-to-TFSA transfers, and investing RRIF withdrawals wisely, retirees in Ontario can minimize taxes and maximize retirement income.

Step-by-Step Guide: Transferring Your RRSP/RRIF to a TFSA or Non-Registered Account

Transferring funds from an RRSP or RRIF to a TFSA or non-registered account can be a powerful way to optimize your retirement savings—if done correctly. This section walks you through the different methods, tax impacts, and best timing strategies to make the transition as tax efficient as possible.

In-Kind Transfers: Keeping Investments Intact

An in-kind transfer allows you to move an investment—such as stocks, mutual funds, or ETFs—directly from an RRSP or RRIF to a TFSA or non-registered account without selling it first.

How In-Kind Transfers Work

1. Request an in-kind withdrawal from your RRSP or RRIF.
2. The transferred asset is deemed as sold at its market value at the time of transfer.
3. The value of the asset is added to your taxable income, just like a cash withdrawal.
4. If moving to a TFSA, you must have enough contribution room to accommodate the transfer.

Tax Impact of In-Kind Transfers

• Capital gains tax does NOT apply when transferring from an RRSP or RRIF—but the full market value is taxed as income.
• If the asset has decreased in value, you still pay tax on its full market value at the time of transfer, meaning potential tax inefficiencies.
• Once inside a TFSA, the asset can grow tax-free, and all future withdrawals remain tax-free.

Example – In-Kind Transfer in Action

Michael, a retiree in London, ON, owns $10,000 worth of stock in his RRSP. Instead of selling the stock and withdrawing the cash, he transfers it in-kind to his TFSA. The stock is deemed as sold at market value, so $10,000 is added to his taxable income for the year. However, once inside the TFSA, any future gains or dividends from this stock will be completely tax-free.

Key Takeaways:

✅ In-kind transfers keep investments intact but are taxed as income.
✅ They can be useful when moving investments into a TFSA for tax-free growth.
✅ Avoid transferring depreciated assets, as capital losses cannot be claimed.

Cash Withdrawals and Contributions: When It’s Beneficial

An alternative to in-kind transfers is withdrawing cash from an RRSP or RRIF and reinvesting it into a TFSA or non-registered account. This strategy can be particularly useful if planned around low-income years or if withholding tax is carefully managed.

When a Cash Withdrawal Makes Sense

• You expect lower income in a specific year (e.g., before OAS and CPP begin).
• You have a large tax deduction (e.g., medical expenses, charitable donations) to offset some of the tax impact.
• You want to replenish your TFSA contribution room to maximize tax-free savings.

Withholding Tax Considerations

When withdrawing cash from an RRSP, the financial institution withholds tax immediately based on the amount withdrawn:

Note: The final tax rate you owe depends on your total annual income.

Example – Strategic Cash Withdrawal

Sandra, a retiree in Chatham, ON, has $50,000 in her RRSP and $40,000 in unused TFSA contribution room. Instead of withdrawing the full amount at once (which would result in a 30% withholding tax), she:

1. Withdraws $10,000 in December (withholding tax: 20%).
2. Withdraws another $10,000 in January of the next year (withholding tax: 20%).
3. Deposits the full amount into her TFSA, where it continues to grow tax-free.

By spacing out withdrawals over two years, she reduces the immediate tax impact and maximizes her TFSA contributions.

Key Takeaways:

✅ Small withdrawals over multiple years can reduce withholding tax.
✅ Withdraw during low-income years to minimize tax impact.
✅ TFSA contributions should be timed to maximize tax-free growth.

Strategic Withdrawal and Contribution Timing

Timing is everything when transferring RRSP or RRIF funds. Making withdrawals at the wrong time can result in higher taxes, while strategic timing can help reduce your overall tax bill.

Best Times to Withdraw & Contribute

Whether using in-kind transfers, cash withdrawals, or timing strategies, the key to tax-efficient RRSP & RRIF transfers is planning ahead. By understanding the tax impacts and best timing for each method, Ontario retirees can maximize their retirement income while minimizing taxes.