Whether you're looking to consolidate accounts, reduce investment fees, or explore new investment options, you’ll likely be faced with having to transfer your Registered Retirement Savings Plan (RRSP) to a new financial institution.
However, before you embark on this journey, it's important to understand the process, fees, and available options. Let’s walk through the essentials of transferring your RRSP in Canada.
Read more: What is an RRSP?
What is an RRSP transfer?
An RRSP transfer involves moving your existing RRSP savings and investments from one financial institution to another. It's essentially a process of changing the custodian of your retirement savings while maintaining the tax-advantaged status of the funds.
This transfer allows you to continue growing your retirement nest egg while seeking new benefits, such as lower fees and better investment opportunities.
Why you might want to transfer your RRSP
There are several compelling reasons why you might consider transferring your RRSP:
Consolidation: If you have multiple RRSP accounts with different institutions, consolidating them into a single account can simplify your financial management and reduce paperwork.
Reducing fees: Some financial institutions charge higher fees or offer limited investment options. Transferring your RRSP to a more cost-effective or diversified provider can help you save on fees and potentially increase your returns over the long run.
Legal requirements: When you reach the age of 71, Canadian law requires you to convert your RRSP into a Registered Retirement Income Fund (RRIF) or an annuity. Transferring your RRSP can help you meet this legal obligation.
Life changes: In the event of your death, divorce, or separation, you may want to transfer your RRSP to your spouse or common-law partner as part of a financial settlement. It's important to note that this transfer may incur taxes. Essentially, you'd need to withdraw the funds, pay withholding tax on the withdrawal, and then allocate the remaining amount to your spouse or partner.
Supporting a loved one: If you have a financially dependent disabled child or grandchild, transferring your RRSP to a Registered Disability Savings Plan (RDSP) can provide critical financial support for their future. You may be able to transfer your funds without taxes under certain conditions outlined by the Canada Revenue Agency (CRA).
Improved investment options: If you believe that your current RRSP provider doesn't offer the investment choices you desire, transferring allows you to explore new investment options that align better with your financial goals.
Common misconceptions on RRSP transfers
There are many benefits to transferring an RRSP, but some people may be put off by some of the popular misconceptions floating around. Here’s what you might have heard, and what you need to know.
Misconception #1: Transfer fees are high.
It’s true that transfer fees can range from $50 to $150 plus tax. However, they don't have to be a financial burden. It's possible to negotiate with your new bank to cover some, or all, of your transfer-out costs.
Misconception #2: Transfers incur taxes, potentially negating any benefits you might gain from transferring.
Actually, Transfers do not trigger taxes in Canada. You can opt for either an in-kind transfer or an in-cash transfer, depending on your financial objectives and the assets involved. We'll delve deeper into these options shortly.
Types of RRSP transfers
With that out of the way, let’s dig into the different ways to transfer your RRSP to help you decide which one works best with your financial goals and circumstances.
Partial transfers: As the name suggests, partial transfers allow you to move specific positions within your RRSP account from one financial institution to another. This option gives you flexibility while letting you maintain some investments with your current provider.
Full transfers: If you prefer to move your entire RRSP account from one bank or dealer to another, a full transfer is the way to go. This option simplifies your financial planning and is particularly useful when consolidating your retirement savings.
In-kind transfers: This type of straight transfers involves moving your assets directly from one account to another without having to liquidate any investments. However, the financial institution where you’re transferring your account must offer the same investment assets as your current provider. It is a seamless way to preserve your investment positions.
In-cash transfers: In-cash transfers entail selling, liquidating, or redeeming assets in your old account and transferring the cash to your new account. This option is typically used when the new bank does not offer an identical account or investment option. If you choose this path, you should consult a financial advisor to navigate potential tax implications.
Note: When transferring non-registered accounts in addition to your RRSP, you might trigger capital gains tax. Seek professional advice to understand the full implications.
The RRSP transfer process
To transfer your account, you’ll want to follow these simple steps:
Choose your transfer type. First, decide whether you want to opt for an in-kind transfer or an in-cash transfer. Your decision should align with your investment goals and the assets involved.
Consult with the new bank. Speak to the new financial institution where you intend to transfer your RRSP and provide them with a printout of your current investments.
Ask about fees and financial ramifications. During this visit, inquire about their willingness to cover your transfer-out fees.
Fill out your T2033 transfer form. Complete the T2033 transfer form provided by the new bank, which is a standard document for transferring RRSPs in Canada.
Follow up with the financial institution. Confirm your transfer is complete. RRSP transfers typically take no more than 10 business days.
Transferring versus withdrawing your RRSP
It's important to distinguish between transferring and withdrawing funds from your RRSP.
When you withdraw from your RRSP, you are taking money out of the account, which is subject to immediate taxation, and you lose contribution room. This withdrawal is generally reserved for financial emergencies or for receiving retirement income.
When you transfer your RRSP, you’re moving your investments to a new financial institution while keeping them sheltered from immediate taxation. It's a strategic maneuver to enhance your financial situation without losing the tax benefits of your RRSP.
Why you might want to withdraw from your RRSP
You may at one point need to withdraw funds from your RRSP. It's essential to understand the implications of RRSP withdrawals, as they can have different tax consequences, depending on the purpose of the withdrawal. Here are some common scenarios:
Homebuyers' plan (HBP): The Homebuyers' Plan allows first-time homebuyers to withdraw up to $35,000 from their RRSP to purchase a home without incurring immediate taxes. This withdrawal should be repaid within 15 years. If not repaid as required, it will be added to your taxable income.
Lifelong Learning Plan (LLP): The Lifelong Learning Plan permits you to withdraw up to $10,000 in a calendar year from your RRSP to finance your or your spouse's education. You must repay the amount withdrawn within 10 years.
Emergent financial need: If you find yourself in a financial crisis, you can withdraw funds from your RRSP. Keep in mind that these withdrawals are fully taxable, and you'll need to report them as income in the year you make the withdrawal.
Regular retirement withdrawals: When you retire, you'll likely begin withdrawing funds from your RRSP as a source of retirement income. These withdrawals are taxed as regular income and can have an impact on your tax liability.
Before withdrawing from your RRSP, consult with a financial advisor or tax professional to understand any specific tax implications of the withdrawal. Proper planning can help you make informed decisions about when and how to access your RRSP savings while minimizing your tax liabilities.
Ready to find the right RRSP?
Talking through your RRSP options with a financial advisor is an important step. Discuss your financial and retirement goals to make informed choices that minimize and provide you with a reliable source of income throughout your retirement years.
By understanding the process, addressing common misconceptions, and staying informed about the options available, you can ensure that your retirement savings continue to grow with you.