You can save diligently, invest wisely, and even retire with seven figures in your RRSP. But one wrong move at the wrong time can cost you hundreds of thousands in unnecessary taxes throughout retirement. Many Canadians don’t even realize they’ve made a mistake until it’s too late.
In this post, we’ll walk through a real-life example of “John,” a retiree who nearly made a costly RRSP withdrawal mistake. You’ll see what went wrong, why it happens so often, and what strategies you can use to avoid falling into the same trap.
John’s Situation
John is 64, a widower, and receiving a $35,000 annual pension from his late spouse. His portfolio looked like this:
- RRSPs: $800,000
- TFSA: $140,000
- Non-Registered Account: $250,000
- Home: Owned, but excluded for this example
His plan was to take CPP and OAS at 65, which would add about $1,400/month from CPP and $739/month from OAS. He wanted to spend roughly $6,000/month after tax, with that amount increasing each year to keep pace with inflation.
The RRSP Meltdown Strategy
Many retirees have heard of the RRSP meltdown strategy. The concept is simple: withdraw from your RRSPs earlier in retirement while you’re in a lower tax bracket, rather than leaving a large balance to be taxed all at once at death (often at 50%+).
John was determined to avoid that scenario. His plan was aggressive: withdraw up to $253,000 per year, pushing his income just below the 50% tax bracket. The idea was to drain his RRSPs quickly to avoid a future tax bomb.
The Problem With John’s Approach
On paper, John’s strategy removed the large tax liability in his RRSPs. Within four years, his accounts were emptied, and his cash flow plan was technically 140% funded. But here’s what went wrong:
- OAS Clawback: With annual income over $250,000, John’s OAS would be fully clawed back, eliminating a lifetime benefit.
- High Immediate Taxes: He paid nearly 48% tax during those aggressive withdrawal years.
- Estate Value Lost: At life expectancy (age 85), John’s estate would have been just over $1 million.
He avoided the 50% tax bill at death but created new problems by paying more tax upfront and losing government benefits.
A Smarter RRSP Withdrawal Strategy
We walked John through a more balanced approach:
- Delay CPP and OAS to Age 70
- This gave six extra years to draw down RRSPs without worrying about OAS clawback.
- He also earned permanent increases to CPP and OAS benefits.
- Smooth Withdrawals
- Instead of withdrawing $253,000/year, we targeted $115,000 until age 70.
- After OAS began, withdrawals were adjusted to keep taxable income around $93,000—below the clawback threshold.
- Tax Bracket Management
- By staying in the 38% tax bracket instead of jumping into 47%, John paid less overall.
The Results
With this adjusted plan, John’s numbers looked much better:
- At age 85: His estate would be worth $1.3 million—nearly $300,000 more than under his original plan.
- Cash flow: His retirement was still over 150% funded, leaving plenty of security.
- Flexibility: If his health declined, withdrawals could always be adjusted to be more aggressive.
Even if John passed away earlier, the break-even point was around 7–8 years. Beyond that, the smarter withdrawal strategy consistently produced a larger estate and more efficient taxes.
Key Takeaways
Don’t Rush Withdrawals: Aggressively draining your RRSP can backfire, especially if it pushes you into higher tax brackets.
Mind the OAS Clawback: High withdrawals at the wrong time can erase government benefits.
Plan for Longevity: A smoother, tax-efficient withdrawal strategy usually leaves more for your retirement lifestyle and your estate.
Final Thoughts
Withdrawing from your RRSP is more complex than simply avoiding a large tax bill at the end. As John’s story shows, timing, government benefits, and tax brackets all play a major role.
At Trans Canada Wealth, we specialize in creating steady, tax-efficient income strategies for Canadians in retirement. If you’d like a personalized RRSP withdrawal plan, book a complimentary call today and avoid making a costly mistake.
