A well-timed RRSP withdrawal strategy can reduce your taxes and grow your estate. But in some cases, withdrawing early may actually leave you worse off.
In this case study, we’ll walk through a real example that shows how your RRSP withdrawal strategy should be based on your income, expected return, and how your accounts are structured.
Let’s take a look at Ryan’s situation.
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Ryan’s Income and Portfolio
Ryan is 65, lives in Manitoba, and is fully retired. He sold a business a few years ago and now earns $180,000 annually from other sources. He does not currently need to withdraw from his RRSP.
Here is what his financial picture looks like:
• RRSP: $1.3 million
• TFSA: Maxed out and topped up annually
• Annual income: $180,000
• Expected portfolio return: 6 percent per year
• Investment mix: 50 percent stocks, 50 percent conservative income
He recently reached out with a common question: Should I begin making RRSP withdrawals today while I am still in a relatively lower tax bracket?
What Happens If He Withdraws Now?
Ryan is currently in a 46.4 percent tax bracket. That means any RRSP withdrawal he makes today will be taxed at almost half. He does have some room before hitting the 50 percent top marginal bracket, so we modeled a $66,000 withdrawal.
After paying tax, Ryan would be left with $35,000 to invest in a non-registered account.
If that $35,000 grows at 6 percent for 20 years, it becomes $120,000. On the other hand, if Ryan leaves the full $66,000 in his RRSP and allows it to grow at the same rate, it would become $244,000. After paying tax at the highest rate in the future, he would be left with $111,000.
At first glance, it seems like the non-registered account is the better deal. But there’s one key factor missing.
The Impact of Tax in the Non-Registered Account
The 6 percent return in a non-registered account is not tax-free. Ryan would pay annual tax on interest, dividends, or capital gains. Assuming his net after-tax return is closer to 5 percent, that $35,000 would only grow to $98,000 over 20 years.
That means Ryan would be better off paying 50 percent tax later rather than 46 percent now, because the RRSP continues to grow tax-sheltered while he’s alive.
Does That Mean He’s Stuck?
Not necessarily. This is where your RRSP withdrawal strategy needs to consider both your tax position and how your portfolio is allocated.
Ryan mentioned that he expects a 6 percent return overall, based on an even split between stocks and conservative investments. For simplicity:
• Stock portion earns 8 percent
• Conservative portion earns 4 percent
• Combined return: 6 percent
In the earlier example, the $35,000 withdrawn from the RRSP and invested in a non-registered account was modeled with a 5 percent return. But what if he invests that $35,000 entirely in his stock portion, which is expected to grow at 8 percent?
To keep his overall portfolio balanced at 50-50, he could then shift more of his RRSP to conservative investments. The total return remains the same, but now the money outside the RRSP is growing faster.
In this revised scenario, the numbers now favor making RRSP withdrawals today.
If you want to build an RRSP withdrawal strategy that’s tailored to your income, risk profile, and estate goals, we can help.
