RRSP Meltdown Strategy: When to Start Your CPP is one of the most common — and most misunderstood — retirement planning questions we see.
If you’re planning to draw down your RRSP early to minimize taxes and reduce your estate’s final tax bill, the timing of your CPP becomes critically important. Get it wrong, and you could lose thousands in tax efficiency.
Let’s walk through when it may make sense to start your CPP early, when it may not, and how this decision ties into your broader withdrawal plan.
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What Is an RRSP Meltdown Strategy?
An RRSP meltdown is a strategy used to draw down your RRSP or RRIF in the early years of retirement, ideally while you’re in a lower tax bracket.
The goal is to:
- Reduce the size of your RRSP before age 72 (when minimum RRIF withdrawals kick in)
- Minimize taxes later in retirement
- Avoid OAS clawbacks
- Lower the taxable value of your estate
It works best when your income is temporarily low, for example, between the ages of 60 and 70, before you’re forced to take RRIF withdrawals or before starting CPP and OAS.
Why CPP Timing Matters During an RRSP Meltdown
At first glance, it might seem smart to take CPP early at age 60. More income earlier, right? But if you’re trying to draw down your RRSP while in a lower tax bracket, that early CPP income can work against you.
Let’s look at an example.
Imagine you want to keep your taxable income at $70,000 per year.
If you start CPP at 60 and receive $9,600 in annual CPP payments, you only have room to withdraw $60,400 from your RRSP.
But if you defer CPP, you can draw the full $70,000 from your RRSP, pulling out more from your account while you’re still in a low bracket.
Over 10 years, that’s close to $100,000 more drawn from your RRSP, reducing future taxes and OAS clawback.
When Deferring CPP Makes Sense
Deferring CPP to age 65 or 70 is often the better choice if:
- You have a large RRSP balance
- You’re planning to draw income from RRSPs early
- You expect to live into your 80s
- You want to reduce your estate’s final tax bill
In these cases, deferring CPP lets you:
- Withdraw more from RRSPs early
- Keep income smooth and in lower brackets
- Let CPP grow with the deferral bonus and inflation protection
When Taking CPP Early Makes Sense
However, taking CPP early could be the better option if:
- You have shorter life expectancy or health issues
- You don’t have much in your RRSPs
- You need the income now
- You aren’t doing a full RRSP meltdown
For example, if you only have $100,000 in your RRSP, there’s little risk of large tax spikes later. In that case, taking CPP early might simply give you more flexibility.
Final Thoughts
When it comes to RRSP meltdown strategy, the timing of your CPP is not a standalone decision. It’s a puzzle piece that affects your entire income and tax plan.
The right timing depends on your income goals, RRSP size, health, and long-term legacy goals.
Want help designing a tax-smart retirement income plan that gets this right?
