# Move RRSP into TFSA?



## Binkmaster (Aug 9, 2010)

I was wondering if I should liquidate my RSP, take the penalties and taxes and roll the left over money into my TFSA.

I know I can only contribute a max of $5000 per year into my TFSA, the extra I would put into my wifes TFSA.

I was just thinking that it seems silly to let it grow for another 35 years only to be taxed on withdrawl, when I can take the hit now, and let it grow in my TFSA for 35+ years and have no tax hit upon withdrawl.

Am I seeing the big picture clearly?


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## MoneyGal (Apr 24, 2009)

It really depends on whether you think you are going to be in the same, a higher, or a lower tax bracket when you retire (or, more accurately, when you withdraw the funds).


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## steve41 (Apr 18, 2009)

It would depend on the numbers.... your age, current salary, how much currently in your RRSP. My guess would be no, but I could be wrong.

If the RRSP is meant to provide a smooth level of retirement funding rather than a special lump sum cash call, it is a pretty safe approach.


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## brad (May 22, 2009)

I also think it could depend in part on your age. Let's say you have $5,000 to invest now. If you invest it in your RRSP, you'll enjoy a small tax savings now (based on your $5,000 contribution), but if you've got enough years ahead of you that your $5,000 might grow to, say, $50,000 by the time you retire then you'll pay taxes all that when you withdraw.

If you invest the $5,000 in a TFSA instead and it grows to $50,000, you'll only be taxed on your $5,000 today, not the $45,000 in gains. To to do a fair comparison, you also need to calculate how much income tax you paid on your $5,000 today and figure out what that amount (plus the growth in your $5,000 investment) would have been worth at retirement age if you'd invested in your RRSP instead. And as MoneyGal notes, you have to make an assumption about your future tax bracket.

In real life, I don't know whether most people would actually use their tax savings to increase their RRSP contributions -- the evidence I've seen suggests that most don't. On the other hand, you can only contribute $5K annually to a TFSA whereas your limits for contributing to an RRSP could be considerably higher.


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## steve41 (Apr 18, 2009)

Plus.... the issue of tax rates on withdrawal being higher or the same as tax rates on contribution is a very hard one to simulate, especially for a 'die-broke' (or leave a modest estate) plan.

It is complicated by the time value of money effect.... getting an immediate tax break now vs a far term tax hit 30-40-50 years hence.


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## jamesbe (May 8, 2010)

If the government would have retro-balanced our TFSA's IE, you get $5000 since you were 16 then this would be a a no-brainer. I'd take all money that would go in RRSPs and put them in a TFSA but $10k now is a little too small.


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## the-royal-mail (Dec 11, 2009)

Yeah I know. It's like the years can't go by fast enough. I now have my 2011 TFSA allotment saved and in the bank but can't put it in the account until after the new year.

Oh well you know what they say, a bird in the hand is mightier than the bush.


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## steve41 (Apr 18, 2009)

OK I ran several examples. The subject is 40 and has 200K in his RRSP, earns $75K, retires at 65.

In one scenario, I left the RRSP alone and directed all savings to the TFSA. Result $48733 ATI

Next scenario. Continue to max the RRSP... nothing to TFSA. Result $448643 ATI

Next scenario.... move RRSP aggressively into TFSA at $50K per year. Result $48238 ATI

Ditto, except move at $20K per year. Result $48528 ATI

Ditto except move at $10K per year. Result $48444 ATI

Lesson? From what I can see, it really doesn't matter a lot. Between leaving the RRSP alone to grow on its own (directing all subsequent savings to the TFSA) and continuing to max out the RRSP (avoiding the TFSA), you are talking about a $90 a year difference. This reinforces the 'RRSP is tax neutral' maxim, BTW.

Province BC, rate 5%, inflation 2%, dying broke at 95.


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## slacker (Mar 8, 2010)

I wouldn't do it personally. The tax hit from withdrawing today compounded for 35 years will likely remove any advantage. If you feel that TFSA is a better vehicle for your retirement savings, then you can simply contribute to your TFSA going forward.

Besides, saving for retirement only in TFSA probably isn't enough.


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## m3s (Apr 3, 2010)

slacker said:


> I wouldn't do it personally. The tax hit from withdrawing today compounded for 35 years will likely remove any advantage. If you feel that TFSA is a better vehicle for your retirement savings, then you can simply contribute to your TFSA going forward.
> 
> Besides, saving for retirement only in TFSA probably isn't enough.


+1

Personally I do a 50/50 split


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## stephenheath (Apr 3, 2009)

The problem is by withdrawing the funds from the RRSP, you lose that contribution room forever. If you're this fiscally astute with 35+ years left to go for retirement, I doubt you will retire with debt, so personally I think it's quite likely that in the future you will max out both the TFSA and the RRSP, so I wouldn't bother cashing out, just divert all new contributions to the TFSA until it's maxxed out.


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## OhGreatGuru (May 24, 2009)

Binkmaster said:


> I was wondering if I should liquidate my RSP, take the penalties and taxes and roll the left over money into my TFSA.
> 
> ...


How disciplined are you in your savings? It is psychologically "easier" to withdraw from a TFSA compared to a RRSP. But with so many people saving too little for retirement, it may be better to keep temptation further away.


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## ChrisR (Jul 13, 2009)

Let's say "Fred" has $10,000 in TFSA space and he's considering transferring money out of his RRSP to fill this space. For simplicity we will assume that Fred has a marginal tax rate of 35% today, and will also have a 35% marginal tax rate when he retires. Fred's retirement date is 25 years away.

Scenario 1: Fred withdraws $15,384.62 from his RRSP. After 35% tax, he is left with $10,000 which he contributes to a TFSA. Fred's TFSA earns a respectable 6% per year, and after 25 years his TFSA has grown to $42,918.72. There is no tax owing on this money, so Fred is free to spend it as he pleases.

Scenario 2: Fred decides to just leave his money where it is, in the RRSP. Again, he earns 6% per year on his investment, and after 25 years his $15,384.62 has grown to $66,028.80. Unfortunately, before this money can be spent, the tax man has to be paid. Fred's marginal tax rate is still 35%, so after paying his tax bill Fred is left with $42,918.72. 

Neat! If the tax rate paid at the time of the transfer is the same as the tax rate paid during retirement, then there is NO difference between the RRSP and the TFSA. The only way it makes sense to make this transfer is if you expect to be in a much higher tax bracket in retirement than you are right now.

There are a few other considerations:
- RRSP withdrawals can affect Old-age security benefits, whereas TFSA withdrawals supposedly will not.
-TFSAs are forever, whereas money eventually has to be withdrawn from the RRSP (ie. the tax man won't wait forever!)


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## m3s (Apr 3, 2010)

However chances are that Fred has been spending his tax refund on hookers and blow... therefore he would have been better off with the same deposit into a TFSA

TFSA = RRSP only works if you re-invest 100% of the refund


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## steve41 (Apr 18, 2009)

> TFSA = RRSP only works if you re-invest 100% of the refund


Maybe I am wrong, but whenever I recvd a RRSP refund check, it never said "THIS MONEY IS NOT TO BE RE-INVESTED. ON PENALTY OF DEATH!

Mind you, I may have missed it.


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## brad (May 22, 2009)

steve41 said:


> Maybe I am wrong, but whenever I recvd a RRSP refund check, it never said "THIS MONEY IS NOT TO BE RE-INVESTED. ON PENALTY OF DEATH!
> 
> Mind you, I may have missed it.


Without a representative survey there's no way to know what people do with their refunds, but it's a common strategy to use tax refunds to help pay down a mortgage, for example (that's what I do), and it's also very common for people to use their refunds to buy toys, cars, or vacations (that's what many of my friends do). So I think the assumption that people will use their refunds to invest more in their RRSP is just as questionable as the assumption that they will not.

I think we all just have to be explicit about the assumptions in our scenarios (refunds are re-invested), and present an alternative scenario with different assumptions (refunds are not re-invested).


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## Four Pillars (Apr 5, 2009)

You don't have to reinvest the refund to get the benefit from an RRSP. 

It's just that when people compare RRSP to non-RRSP contributions they often compare after-tax RRSP contributions to after tax non-RRSP contributions. This comparison is not valid if you don't reinvest the refund.

Ie if I contribute $10k to my rrsp and then "blow" the refund on my mortgage - I've done some great things with this money. $10k in the rrsp and my mortgage is reduced by $4k+.

However, I cannot compare the $10k in the rrsp to the $10k that would be in a TFSA, had I contributed there instead.


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## humble_pie (Jun 7, 2009)

my 2 cents, w 2 cents being as worthless as a farthing these days.

i have little faith in those convoluted 30 and 40 year algorithmic projections about one's future rrsp, financial life after retirement etc. I don't think they bear sufficient relationship to actual human life, which can be messy. In this forum we've seen how obsessively they can be fought over. They are certainly useful, perhaps to be utilized once or twice in a lifetime in order to set a savings course, but hardly the be-all & end-all..

far more important to success in old age, at least to me, is the ability to grow more flexible & adaptable as the years pass, so that if surprises occur the human being will still be rich with emotional life, wisdom and love for others. These are the things that matter.

fwiw i'd keep the rrsp. I'd max a tfsa asap, even if i had to work extra hours, or find an extra job, or get strictly more frugal with my lifestyle for a year or two. All a tfsa needs to date is 10k. Saving the next 5k per annum means slightly less than $13.70 per day, an amount that is doable.


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## MoneyGal (Apr 24, 2009)

humble_pie said:


> i have little faith in those convoluted 30 and 40 year algorithmic projections about one's future rrsp, financial life after retirement etc. I don't think they bear sufficient relationship to actual human life, which can be messy. In this forum we've seen how obsessively they can be fought over. They are certainly useful, perhaps to be utilized once or twice in a lifetime in order to set a savings course, but hardly the be-all & end-all..


d'-'

(We don't have a thumbs-up smiley; this is me kickin' it old school)


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## jamesbe (May 8, 2010)

What RRSP refund are you talking about?

If I wait till end of year to invest in my RRSP and say I put $10k I will get a refund of say $4000 (just an estimate for arguments sake).

But I and I'm sure many contribute to their RRSP on each pay cheque. My company removes say $500 a pay into my RRSP. So I never see a "refund" but I suppose I could calculate it somehow by figuring how much tax I saved on each pay.

For this reason I am going to assume that most people do not reinvest their "refund"


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## steve41 (Apr 18, 2009)

humble_pie said:


> my 2 cents, w 2 cents being as worthless as a farthing these days.
> 
> i have little faith in those convoluted 30 and 40 year algorithmic projections about one's future rrsp, financial life after retirement etc. I don't think they bear sufficient relationship to actual human life, which can be messy. In this forum we've seen how obsessively they can be fought over. They are certainly useful, perhaps to be utilized once or twice in a lifetime in order to set a savings course, but hardly the be-all & end-all..
> 
> ...


Humble... you can definitely feel comfortable in the fact that you live in the decided majority. I seem to recall that only something like 11% of all working individuals have a written financial plan, whereas 78% of all homes will have a dartboard tucked away somewhere.


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## cardhu (May 26, 2009)

Binkmaster ... you haven’t provided enough information to say whether it makes sense, in your particular circumstances, to do what you’re proposing ... the answer for most people would be no, but the question is are you among that majority? 

Are you in a position that you can’t afford both and must choose between them? If so, do you expect to remain in that position for the rest of your life? ... TFSAs are great, but they are not necessarily any more tax efficient than RRSPs for generating a retirement income, and in many cases are less tax efficient ... I’d say leave the RRSPs alone, and if you want to divert “new money” to TFSA for a while, do that ... and in the meantime learn more about the pros and cons of each approach so that you can refine and optimize your strategy over the course of the next 35 years. 

The key is your comparative tax rates at contribution and withdrawal ... its not critical which tax bracket you end up in during retirement, what matters is the tax rate that RRSP/RRIF withdrawals face in retirement ... they are related, but they are not the same thing ... if you plan well, you could conceivably retire in a higher tax bracket, but pay lower taxes on your withdrawals ... when the tax rate is equal at contribution and withdrawal, the performance of the RRSP will be identical to that of the TFSA ... all returns earned within the RRSP would be taxed at an effective rate of 0%. 



mode3sour said:


> TFSA = RRSP only works if you re-invest 100% of the refund


Whether or not the tax break from an RRSP is “reinvested” is a red herring ... investing the tax savings simply means investing more money ... there’s nothing wrong with that, but it has no bearing on the tax-efficiency of the investment ... you cannot improve the tax efficiency of RRSP by investing the tax break, and you cannot damage its tax efficiency by spending the tax break ... every dollar placed into RRSP has its own built-in tax-efficiency, regardless of what the investor does with the tax savings. 

Flexibility differences aside, TFSA = RRSP is a function of relative tax rates ONLY ... whether the investor chooses to invest more money, or less money, has nothing to do with it. 



jamesbe said:


> If the government would have retro-balanced our TFSA's IE, you get $5000 since you were 16 then this would be a a no-brainer. I'd take all money that would go in RRSPs and put them in a TFSA but $10k now is a little too small.


A no-brainer in some circumstances, perhaps, but not universally ... there are a great many run-of-the-mill circumstances, in which the RRSP can outperform TFSA on an after-tax basis, by a VERY wide margin.


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## kcowan (Jul 1, 2010)

It can make sense in an early retirement scenario. e.g. retire at 55 and live off the RRSP, paying tax at the lowest rates. Then apply for CPP and OAS to supplement or replace the RRSP w/d, deferring further w/d until age 72. This approach can be used to minimze clawbacks to both OAS and the Age Credit.


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## humble_pie (Jun 7, 2009)

do you feel better lobbing sarcasm steve.

you've missed my point entirely. My point is that by far the better preparation for old age is gaining flexibility, wisdom and love. I wouldn't expect a brittle personnage to understand what i'm talking about.

there's no dart board in my home. I've had a plan all my life. It's working out far better than i'd expected. I also try to think of others every day and carry out regular charitable activities & donations. If war, depression, armageddon, or a major setback such as a severe accident that could permanently cripple a child of mine were to occur, these would all skew your projections, while i have strong psychosocial & spiritual resources as well as material resources you're not able to program. Yet any single one of these major disasters could happen to any or all of us.

bref, i find death-and-hoarding-by-numbers to be useful, but only as another adjunct to life.


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