You could be walking straight into a retirement tax trap, a six-figure mistake with your money without even realizing it.
That’s exactly what was happening to David. His plan looked smart on paper, but it set him up for a crushing tax bill down the road.
Here’s how his strategy played out, why it backfired, and the smarter approach to keep more of what you’ve earned.
Meet David: A Tax-Averse Retiree
David is 60 years old and recently retired. Like many Canadians, he absolutely hates paying taxes.
- David receives a $36,000 pension (indexed to inflation).
- He has $150,000 in a TFSA, $325,000 in a non-registered account, and $1.4 million in RRSPs.
- His plan is to start CPP right away and OAS at 65.
- Retirement spending goal: $70,000 per year, after tax.
David’s plan seemed logical: spend from his non-registered account first, delay touching his RRSPs until age 71, and keep taxes as low as possible in the meantime.
The Problem With Delaying RRSP Withdrawals
On the surface, David’s approach kept his annual tax bill low in his early 60s, but here’s what happened later:
- Once his RRSPs converted to a RRIF at 71, he was forced to take out over $115,000 in the first year alone.
- His annual income shot up to $190,000, pushing him well above the OAS clawback threshold.
- He had to repay nearly $10,000 of OAS benefits in a single year.
- By age 85, his RRSPs still held $1.5 million, creating a massive tax liability at death.
Final tax bill under this strategy: $890,000.
David did manage to meet his cash flow needs, but the tax burden in his 70s and at death turned his “low-tax” plan into one of the most expensive decisions of his life.
The Smart Withdrawal Strategy to Avoid a Tax Trap
Instead of letting RRSPs grow untouched, here’s what we recommended for David:
- Delay CPP and OAS to age 70 (higher lifetime benefits).
- Draw down RRSPs earlier while his income is in a lower bracket.
- Top up his TFSA regularly to maximize future tax-free growth.
- Target an annual income of around $177,000 until age 70, then reduce withdrawals to stay under the OAS clawback threshold.
This strategy raised David’s tax bill in his 60s but prevented the massive spike later.
Final tax bill with this strategy: $372,000.
That’s a savings of over $500,000 compared to his original plan.
It also increased his after-tax estate value from $2.4 million to $3.18 million.
Key Lesson
It’s tempting to minimize taxes today. But retirement planning isn’t just about this year’s tax bill, it’s about your lifetime tax bill, including the final estate taxes your family will face.
By proactively managing withdrawals, you can:
- Avoid OAS clawbacks.
- Reduce forced RRIF withdrawals.
- Lower estate taxes.
- Leave more behind for your loved ones.
Take the Next Step
If you’re wondering whether your current withdrawal plan is quietly setting you up for a future tax trap, we can help.
At TransCanada Wealth Management, we use our Atlas System to align your investments, taxes, and retirement plan so you can move forward with certainty.
