Whether it makes sense to withdraw from your RRSP early to fund a TFSA depends on your current tax bracket, the withdrawal amount, and your long-term retirement goals. In most cases, this is not an optimal strategy because RRSP withdrawals trigger immediate income tax, and you lose the tax-deferred growth on that money permanently. However, there are specific situations (like a temporary income dip) where a calculated early withdrawal might work for you. Understanding the trade-offs is key to making the right choice for your finances. When you withdraw money from your RRSP before retirement, the CRA treats it as income in that tax year. This means: Your taxable income increases, potentially pushing you into a higher tax bracket You may lose federal or provincial tax credits (like the Canada Child Benefit) You pay withholding tax immediately (20-30% depending on withdrawal size) The money grows back in your TFSA at a much slower pace than it would have in your RRSP Let's say you withdraw $10,000 from your RRSP. If you're in the 35% tax bracket, you'll owe roughly $3,500 in taxes. That leaves only $6,500 to invest in your TFSA.
Withholding tax ranges from 20% to 30% on the withdrawal itself, and the full $10,000 is added to your income. Your final tax bill depends on your total income and marginal tax rate for that year. Use your [RRSP Withdrawal Tax Calculator](/tools/rrsp-withdrawal-calculator) to estimate your exact amount.
Yes. When you withdraw from an RRSP, that contribution room is gone forever. You cannot get it back by recontributing later. This is a key reason why early withdrawals are generally not recommended.
No. The CRA treats all RRSP withdrawals as taxable income in the year you withdraw. Withholding tax is applied immediately, and the full amount is added to your income on your tax return.
This CRA rule may apply to you if your income drops significantly. Withdrawing in a lower-income year reduces your tax rate on the withdrawal. However, you still lose the contribution room permanently and forgo long-term compound growth, so the trade-off is often still unfavorable.
Yes, in most cases. TFSA contribution room rolls forward indefinitely with no deadline, so you can catch up without penalty. This is usually smarter than triggering a large tax bill through an early RRSP withdrawal.