2024 has been a stellar year for markets, with portfolios soaring to unexpected heights. But before you celebrate those gains, consider this: could your growing RRSP be quietly building a tax time bomb for your future?
If you’ve had a strong market year, it might be time to rethink your RRSP meltdown strategy. Let’s explore how to adjust your withdrawals to keep taxes low and ensure your retirement stays on track.
What Is an RRSP Meltdown Strategy?
An RRSP meltdown strategy is designed to help retirees minimize taxes throughout their retirement. The concept is simple: you withdraw funds from your RRSP or RRIF (Registered Retirement Income Fund) while you’re in a lower tax bracket, reducing the tax burden on your estate, which could face tax rates exceeding 50%.
While this strategy is effective, it’s not static. A strong market year, for instance, can significantly alter your withdrawal plan.
The Impact of Market Growth on Your RRSP
Let’s take Neil as an example. At 67 years old, Neil’s portfolio was initially built to deplete his RRIF by age 90, keeping his taxable income around $80,000 annually.
Here’s what Neil’s financial picture looked like at the start of the year:
- RRIF: $700,000
- TFSA: $185,000
- Non-Registered Account: $625,000
- CPP and OAS: $1,600/month
Neil wanted to spend $5,000/month (indexed to inflation) while minimizing the tax burden on his estate. Based on these factors, we set a plan targeting withdrawals from his RRIF to keep his taxable income at $80,000 per year. This strategy would leave his RRIF with only $36,000 at age 90—resulting in minimal taxes for his estate.
But then came a remarkable market year. Neil’s portfolio grew by 25%, and suddenly, his numbers looked very different:
- RRIF: $845,000 (up from $700,000)
- TFSA: $231,000 (up from $185,000)
- Non-Registered Account: $781,000 (up from $625,000)
While this growth was fantastic, it completely changed Neil’s tax strategy. If Neil stuck to his original plan, his RRIF would hold $600,000 at age 90—a significant tax burden for his estate.
Adjusting the Strategy
In light of these gains, we adjusted Neil’s plan. To mitigate future taxes, we increased his taxable income target to $90,997 annually. This adjustment would reduce the value of his RRIF to $265,000 by age 90, significantly lowering the tax impact on his estate.
Why not withdraw more aggressively? Because exceeding $90,997 would trigger the OAS clawback, reducing Neil’s Old Age Security payments. In most cases, it’s better to avoid surpassing this threshold, depending on your province of residence.
The Importance of Ongoing Adjustments
Neil’s story highlights a crucial point: your RRSP meltdown strategy isn’t a “set it and forget it” plan. Market performance, inflation, health, and unexpected expenses can all impact your long-term retirement goals.
For example, had Neil stuck with his original plan, he would have veered significantly off course. Constant recalibration is the key to ensuring your strategy adapts to life’s inevitable changes.
Why You Need a Partner in Retirement Planning
Many retirees come to us looking for a one-time RRSP meltdown plan, either because their current advisor isn’t providing this level of guidance or because they’re DIY investors needing expert help.
The truth is, there’s no such thing as a one-time plan. Retirement planning requires ongoing adjustments to stay aligned with your goals.
Final Thoughts
A strong market year is a cause for celebration—but it’s also a time to rethink your RRSP strategy. By adjusting your plan to account for growth, you can keep taxes low and ensure your retirement stays on track.
