In my 2025 wrap up post, a reader left a comment that caught my attention and piqued my curiosity:
“Is it ever advisable to cash out RRSPs, and move it over to TFSAs?”
As we get closer to financial independence and eventually early retirement, this is one of the questions that I have been thinking more and more about. Is cashing out RRSPs and using the money for the TFSA contribution room a good idea?
Let’s face it, the conventional wisdom has been simple: contribute to your RRSP while you’re working, let it grow and compound, then withdraw money from your RRSP/RRIF in retirement.
But does this conventional wisdom always work for everyone?
My reply to this reader was that cashing out RRSP and moving it over to TFSA really depends on your income and situation. There’s no one size fits all solution.
I still stand by this comment. Personal finance is personal. The right strategy, on whether to do RRSP to TFSA conversion, will depend on many different factors: your income level, your age, your retirement timeline, and potentially the various government programs.
I figured it’s time for a detailed post to answer this reader’s question.
A quick refresher on RRSP & TFSA
First, a quick refresher on RRSP and TFSA.
The Registered Retirement Savings Plan (RRSP) is a tax-deferred account. You get RRSP contribution room by having an active working income. The contribution room is 18% of your previous year’s working income and any unused RRSP space from other years. When you contribute to an RRSP, you get a tax deduction that reduces your taxable income in the year you contribute.
The money grows in your RRSP tax-deferred and you are only taxed upon withdrawal. When you withdraw, the money is counted as taxable income in the year you take it out.
The Tax-Free Savings Account (TFSA), on the other hand, is very different from the RRSP. There is a set TFSA contribution room each year (inflation adjusted). Any unused TFSA contribution room can be carried forward.
Unlike the RRSP, you don’t get any tax deductions when you contribute to a TFSA. However, the money inside the TFSA can compound and grow tax-free. When you withdraw money from your TFSA, the money is completely tax-free.
Any TFSA withdrawals are added back to your TFSA contribution room the following year. This is not the case for RRSP withdrawals.
For more details on RRSP and TFSA, check out my guides:
Essentially, the key difference between RRSP and TFSA is how the money and withdrawals are taxed. For the RRSP, you get a tax deduction when you contribute, so you get taxed upon withdrawals. For the TFSA, you do not get any tax deduction when you contribute, so you don’t get taxed upon withdrawals.
Why start withdrawing from RRSP/RRIF at age 71 can be costly
Another important thing to remember about the RRSP is that you must convert an RRSP to an RRIF by the end of the calendar year in which the owner turns 71. The first RRIF withdrawal must come out in the following calendar year. When you convert an RRSP to an RRIF, all the investments inside the RRSP can be transferred in-kind to the RRIF.
Because this is the RRSP rule, many Canadians simply let their RRSPs grow and start taking out the minimum required amount the following calendar year they turn 71.
This could be costly, especially if you have a sizable RRSP. The minimum RRIF withdrawal rate at age 71 is 5.28%. So if you have a million dollars in your RRSP, that means you need to withdraw $52,800 at 71 and the required percentage increases every year. Although $52,800 would put you in the lowest federal tax bracket, if you start adding amounts from pensions, Old Age Security (OAS) and Canadian Pension Plan (CPP), and potentially other income such as dividend income, you will be taxed at a higher marginal tax rate.
To make matters worse, if your net income exceeds $95,323 in 2026 (this threshold is inflation adjusted each year), you will start to lose your OAS through the OAS clawback. You would lose 15% of OAS for every dollar above the threshold.
This is why it may make sense to proactively draw down the RRSP gradually in your low income years – if you have them – to ensure you don’t get hit by a large minimum withdrawal requirement later on.
Take advantage of the low income years
Proactively drawing down the RRSP gradually in your low income years makes a lot of sense. This strategy is especially effective for people who retire early.
When you retire early and do not have a full-time income, your income should be dramatically lower compared to when you were working full-time. If you retire early in your 40s, 50s or even early 60s, it’s unlikely that you are taking the CPP and OAS (it makes sense to defer both to 70 to maximize the amount). Since you are living off your investment portfolio in retirement, we can assume your investment income comes from a combination of TFSA and non-registered accounts.
Because TFSA withdrawals are tax-free, your actual “taxable” income is from non-registered accounts only and should be either taxed at a low tax rate or not taxed at all (remember that both dividend income and capital gains are very tax-efficient).
Therefore, when you’re in a low tax rate, it makes sense to draw down your RRSP strategically. It makes little sense to wait until 71 and be forced to take out a minimum amount from your RRSP/RRIF and potentially trigger a higher tax rate.
In 2026, the basic personal amount federally is $16,452 and $13,216 for BC. So if your net income is $13,216 or less, you don’t have to pay any taxes.
If your net income is higher than $13,216, there’s no need to worry. The lowest tax bracket (federal and BC combined) is $50,363. In this tax bracket, you’re taxed at 19.60% for working income, 9.8% for capital gains, -10.25% for eligible dividends, and 9.91% for non-eligible dividends.
So if your net income is below $50,363, you are paying less than 20% combined federal and provincial tax on your income. This is a lot better than being forced to pay at a higher tax rate at age 71 or later.
Withdraw money from your RRSP, pay the low tax rate, transfer the money over to your TFSA, let it grow, and not have to worry about income tax when you withdraw from your TFSA later on.
This simplifies tax planning in retirement!
Considerations for OAS and GIS
I briefly mentioned the OAS earlier. The OAS clawback catches a lot of retirees off guard, because their net income is too high, which triggers the dreaded OAS clawback (I suppose it’s a good problem to have).
In 2026, the maximum OAS amount is roughly $8,900 from age 65 to 74 and $9,800 for those 75 and older. While it may seem like a small amount, every dollar counts in retirement!
If your income is above $95,323, you repay 15% of OAS for every dollar above that threshold. So if your net income is $100,000 in 2026, you would have to repay $701.55 of your annual OAS, or about 7.9% if you are below 75. If your net income is over $154,753, then you lose your OAS entirely.
There’s also the Guaranteed Income Supplement (GIS) that some Canadians are eligible for. GIS is designed for Canadians 65 or older who have very little retirement income, so most readers probably don’t pay attention to this Canadian retirement benefit. To qualify for GIS, your income must be below $22,512 if you are single, widowed, or divorced. If you and your spouse/common-law partner do not receive OAS, then you qualify for GIS if your combined annual income is $53,952 ($29,760 if both of you receive full OAS).
Since RRSP withdrawals count as income and the OAS clawback and GIS eligibility are calculated using your net income, having a high RRSP withdrawal is not ideal.
When does RRSP to TFSA conversion make sense?
Ok, so now we have covered all the important things to consider, I believe these are the scenarios when RRSP to TFSA conversion makes sense.
Scenario 1: In early retirement with a significant RRSP balance
Mrs. T and I would fall into this situation when we do eventually retire early. When I do step away from full-time work in the near future, my employment income will drop to near zero. Our working income would only come from our side businesses. Our dividend income would come from both TFSAs and non-registered accounts, so it should get taxed very lightly.
In this scenario, when your working income is near zero or significantly below the second tax bracket, it makes sense to withdraw from the RRSP at the lowest tax rate and shift the money into the TFSA.
Scenario 2: You have a large RRSP and a smaller TFSA (common for older Canadians)
You are in this scenario if you have maxed out RRSP throughout your working career but have paid little attention to the TFSA. This is perhaps more common for older Canadians as they approach retirement. If this applies to you, it may make sense to proactively draw down RRSP over 10 to 15 years before 71 to fund your TFSA. This would reduce the size of your RRIF and the eventual minimum withdrawal amount.
Scenario 3: You expect a higher income in the future
There’s a scenario where you could have a higher income in the future than you do now. For example, if you are taking a year off, switching to part-time work, or are in between jobs, you may be earning more in the future. You could proactively withdraw from the RRSP at a lower tax rate and move the money to your TFSA for tax-free growth and income later.
Scenario 4: Equalizing income between spouses
There are benefits to having a similar income level in retirement between you and your spouse/partner.
If one of the spouses/partners has a much larger RRSP, it might make sense to withdraw from the larger RRSP and use the money to fund the other spouse/partner’s TFSA. Of course, you need to make sure there’s sufficient TFSA contribution room.
In this scenario, it would make more sense if the RRSP withdrawer is in a low tax bracket when the withdrawal happens (i.e. you don’t want the spouse in a high bracket and also make RRSP withdrawals, because the RRSP withdrawals will be taxed at the high tax bracket).
When does RRSP to TFSA conversion make no sense?
So, when doesn’t it make sense to convert RRSP to TFSA?
Scenario 1: When you’re still in a high tax bracket
I covered this in Scenario 4 above. It simply doesn’t make sense to withdraw from an RRSP to fund a TFSA when you’re in a high tax bracket. The purpose of the RRSP to TFSA conversion is to optimize taxes in the current year and future years.
Scenario 2: If your RRSP is small
If your RRSP is small, it may not make sense to do the RRSP to TFSA conversion.
Scenario 3: If you’re in the same tax bracket now and in retirement
If you’re going to be in the same tax bracket throughout retirement as you are now, it probably doesn’t make sense to do the RRSP to TFSA conversion.
Scenario 4: If conversion pushes you to a higher tax bracket
This is the scenario we want to avoid at all costs. RRSP withdrawals count as active income, so the amount is added to your taxable income. If RRSP withdrawals push you to a higher tax bracket, then you would end up paying more taxes, making the conversion not very tax efficient at all.
What we are planning to do
As we get closer and closer to financial independence and eventually early retirement, here’s what we are planning to do.
Right now, we have the following accounts:
- My self-managed RRSP
- My work’s RRSP
- Spousal RRSP
- Mrs. T’s RRSP
Mrs. T’s RRSP is relatively small, so we plan to let money compound in there for as long as possible.
When I do walk away from full time employment, I expect my income to drop significantly. At that point, my active income will mostly consist of income from this blog (relatively small), maybe some part-time income, and dividend income from non-registered accounts. Mrs. T would be in the same situation as well.
So before CPP and OAS kick in, the plan is to deliberately withdraw from my self-managed RRSP each year. We need to be careful with the withdrawal amount, just enough to ensure I remain in the lowest tax bracket. Part of the withdrawal will be used for my and Mrs. T’s yearly TFSA contributions. The remainder would be used to fund our expenses.
For the spousal RRSP, we made the last contribution in 2025. To avoid the spousal RRSP attribution rule, this means we can start withdrawing without attribution starting January 1, 2028, at the earliest. When we do withdraw from the spousal RRSP, the income would be taxed in Mrs. T’s hands. Again, the plan is to withdraw an amount that would keep Mrs. T in the lowest tax bracket.
That’s the rough plan at the moment. To be honest, we haven’t fully finalized everything yet because things can still change. For example, we may earn more money through our part-time work in early retirement. It probably makes more sense to do more modelling and calculation when we are closer to early retirement. It may also make sense to consult with a tax specialist to optimize our early retirement tax situation.
Getting started – Things to keep in mind
If the RRSP to TFSA conversion is a strategy you plan to use, here are a few things I would recommend.
1. Know your and your spouse/partner’s RRSP balance and the projected RRIF minimum withdrawals
There are many online RRIF calculators available, so you can find out your mandatory RRIF withdrawal amount based on your current RRSP balance
2. Understand the provincial & federal tax brackets
It’s a good idea to know the basic personal amount and the amount that would result in the lowest tax rate. It is also a good idea to know the net income amount that would put you in the second-lowest tax bracket.
By knowing all these numbers and your expected income in retirement, you can figure out the “sweet spot” withdrawal amount each year.
3. Know your TFSA contribution room
If you have maxed out your TFSA each year, it’s easy to figure out your TFSA contribution room (it’d just be the yearly allowed maximum). If you haven’t maxed out and have multiple TFSAs with different financial institutions, it is a good idea to know how much contribution room you still have.
Although you can find out your total available TFSA room by logging into your CRA account, I find that the amount is not up to date. So it’s better to keep track of everything via a spreadsheet yourself.
4. Model it out
I like using spreadsheets to model things out but if spreadsheets aren’t your thing, there are many different calculators available online. You can always utilize AI, too. Using a fee-only financial planner that can model out the different scenarios is also a good idea.
Summary – Does it make sense to do RRSP to TFSA conversion?
Letting your RRSP sit and not make any withdrawals until 71 may not make sense for everyone. With so many different variables in play and potential early retirement, it may make sense to withdraw from your RRSP and use the money to fund the TFSA.
The key is to run the different models and ensure you can minimize tax, not just in one single year, but hopefully for your lifetime.
The best time to draw down and empty your RRSP/RRIF is most likely not when the government forces you to, but when your tax rate is at its lowest. For many Canadians, that time is well before age 71 and certainly well before OAS and CPP begin.
Let me know what you think about the RRSP to TFSA conversion. Are you considering this strategy? Are you actively using this strategy? I’d love to hear from you.
