Pay Less Tax in Retirement with One Simple Year-End Strategy

As the year comes to a close, many retirees overlook one simple move that could save them thousands in taxes: making an extra RRSP or RRIF withdrawal before December 31st. While it may seem counterintuitive to withdraw more money than you need, it can be a smart long-term tax strategy.

Let’s explore why.

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The Hidden Tax Bomb in Your RRSP or RRIF

One of the biggest downsides of RRSPs and RRIFs is the tax liability they can create later in life. These accounts are tax-deferred—not tax-free. Eventually, all the money inside will be taxed as income.

To understand this better, consider the tax brackets in Manitoba (combined with federal rates). Income is taxed progressively. The more you earn, the higher the rate on the next dollar.

For example, Ron earns $110,000 per year. He is in the 43.4% marginal tax bracket, but his average tax rate is only 29.15% once all brackets are factored in.

This is important because most retirees won’t pay their marginal rate on their entire income. But there is one situation where they might.

What Happens When One Spouse Passes Away

Meet Jim and Val. They are both retired, with annual incomes of $60,000 and RRSPs valued at $500,000 each. If Jim passes away first, his RRSP can roll over to Val tax-free. At that point, Val’s RRSP is now worth $1,000,000.

When Val passes away, the entire $1,000,000 becomes taxable in a single year. That large withdrawal could push her estate into the top tax bracket, with over half of it lost to taxes.

Naming children as beneficiaries on the RRSP won’t solve this problem. The tax is still owed by the estate before any money is passed on.

The Smarter Move: Withdraw a Little More Now

If Jim and Val had each withdrawn an extra $14,000 from their RRSPs while alive, their annual incomes would have risen from $60,000 to $74,000. This would still keep them in the 33.25% tax bracket.

By doing this, they would pay tax now at 33.25% instead of potentially over 50% later. The withdrawn money could be reinvested in a joint non-registered account or used to top up their TFSAs—both options offering better tax efficiency down the road.

Final Thoughts

If you’re sitting on a large RRSP or RRIF balance, it may be worth considering extra withdrawals before year-end. This can help reduce future tax exposure for your estate and make better use of lower tax brackets while they’re still available to you.

Speak with your advisor to model out different scenarios. It might be one of the easiest ways to improve your long-term retirement plan.

For personalized retirement and tax planning advice, visit our website and book an appointment with us.

Click here to book a free consultation with our team.

Watch the full video breakdown here.

Marc Sabourin is a Winnipeg-based Financial Advisor and Retirement Specialist with Harbourfront Wealth Management. His specialty is working with pre-retirees and retirees who are looking for retirement, investment, & tax advice. 

Disclaimer: The views expressed are those of Marc Sabourin, Certified Financial Planner, and Investment Advisor, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund

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