RRSP Meltdown: Strategic Withdrawal Planning

The Problem with Large RRSPs

Mandatory RRIF Withdrawals

At age 71, you must convert your RRSP to a RRIF with minimum withdrawals:

• Age 72: 5.40% of balance
• Age 75: 5.82% of balance
• Age 80: 6.82% of balance
• Age 85: 8.51% of balance
• Age 90: 10.99% of balance

Tax Issues This Creates

• OAS clawback: Income over ~$87,000 triggers 15% clawback
• Higher brackets: Large RRIF income pushes you into higher rates
• Death tax: Full RRSP/RRIF value taxed in year of death
• Loss of credits: Age amount and other credits phase out

The Meltdown Strategy

The concept is simple: Withdraw from your RRSP earlier, in years when your income is lower, to avoid higher taxes later.

Ideal Windows for Meltdown

• Early retirement: After leaving work, before CPP/OAS
• Low-income years: Career gap, sabbatical
• Age 65-71: Before mandatory RRIF minimums

Strategy 1: Fill Lower Tax Brackets

How It Works

• Identify your current marginal tax bracket
• Withdraw RRSP funds to top up to higher bracket threshold
• Pay tax now at lower rate vs. later at higher rate

Example

Sarah retires at 60 with $10,000 income:

• First federal bracket tops at ~$55,000
• Withdraw ~$45,000 from RRSP
• Tax rate: ~20% combined
• Better than 30-40% she'd pay at 72 with full CPP, OAS, and RRIF

Strategy 2: OAS Clawback Avoidance

The Clawback

• Starts at ~$86,912 income (2024)
• 15% of income above threshold is clawed back
• Full OAS eliminated at ~$142,000

The Strategy

• Before age 65, draw down RRSP to reduce balance
• At 65+, keep income below clawback threshold
• Preserve full OAS benefits

Strategy 3: Convert RRSP to TFSA

How It Works

• Withdraw from RRSP
• Pay tax on withdrawal
• Contribute to TFSA (using available room)

Benefits

• TFSA withdrawals don't affect OAS or GIS
• TFSA growth is tax-free
• No mandatory withdrawals from TFSA
• Tax-free to beneficiaries at death

Strategy 4: Income Splitting

Spousal RRSP Conversion

• If one spouse has much larger RRSP
• Consider spousal RRSP contributions now
• Equalizes retirement income later
• Attribution rules: 3-year wait for withdrawals

Pension Splitting

• At 65+, RRIF income can be split with spouse
• Up to 50% can be allocated to lower-income spouse
• May keep both spouses below OAS clawback

When NOT to Melt Down

• High current income: Already in top bracket
• Need the deferral: Money is still working tax-free
• Low future income: Will stay in low bracket regardless
• Estate planning: Want to leave to charity (donation credit offsets)

Calculating the Optimal Strategy

Factors to Consider

• Current and projected tax brackets
• Expected CPP and OAS amounts
• Other retirement income sources
• Life expectancy
• TFSA room available
• Spousal income situation

Tools

• Financial planning software
• Fee-only financial planners
• Tax accountants with retirement expertise

Delaying CPP and OAS

Meltdown works well combined with delaying government benefits:

CPP Delay

• 8.4% increase per year delayed (after 65)
• 42% more at 70 vs. 65
• Draw RRSP to bridge the gap

OAS Delay

• 7.2% increase per year delayed (after 65)
• 36% more at 70 vs. 65
• Higher guaranteed income later

Tax Withholding on Withdrawals

RRSP withdrawals have withholding tax:

Note: Withholding is not final tax—reconciled on tax return.

Example Timeline

John retires at 60 with $800,000 RRSP:

Ages 60-64

• No CPP/OAS yet
• Withdraw $50,000/year from RRSP
• Pay ~$10,000 tax (20%)
• Contribute $7,000 to TFSA

Ages 65-70

• Start CPP at 70 (delayed)
• Continue RRSP withdrawals to stay under OAS clawback
• Split pension income with spouse

Age 71+

• RRSP reduced to manageable size
• RRIF minimums don't trigger clawback
• Full OAS preserved
• TFSA provides tax-free backup income

Common Mistakes

• Ignoring provincial taxes: Vary significantly by province
• Forgetting GIS: Low-income seniors lose GIS with RRIF income
• Not coordinating with spouse: Family planning is crucial
• Waiting too long: Less time to draw down before 71