A few weeks ago, we posted a video about why it can make sense to draw down your RRSPs or RRIFs more aggressively in retirement. After that video, we received an email from a viewer asking how to handle RRSP withdrawals after receiving a terminal diagnosis.
It’s a difficult question, but unfortunately, not an uncommon one. Many Canadians end up in this situation with large RRSP balances and not enough time to draw them down.
Here’s how we typically approach this situation.
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Why RRSPs can create a tax problem later
RRSPs are fully taxable at death unless they are transferred to a surviving spouse. If someone passes away with a large RRSP or RRIF and no spouse to transfer it to, that entire amount is considered income in the year of death. That can push the estate into the highest tax bracket, often over 50 percent.
If you know your life expectancy is shortened, drawing more aggressively from your RRSP now can help reduce this future tax hit.
Let’s walk through a real example
Mr. RSP is 65 years old with an estimated life expectancy of four to five years. His assets include a four hundred thousand dollar home, seven hundred thousand in RRSPs, and one hundred thousand in a TFSA. His total net worth is 1.2 million.
His current income includes CPP and OAS, which total just over eighteen thousand dollars per year. He also planned to withdraw thirty-two thousand per year from his RRSP, giving him a total income of about fifty thousand dollars, which matched his annual expenses and tax bill.
At this pace, if he were to pass away in 2026, his estate would be worth around nine hundred and nine thousand dollars after taxes. If he passed in 2028, the estate would grow slightly to about nine hundred and thirty-eight thousand.
But a lot of that value is still in his RRSP, which means it is exposed to high taxation if he passes away without drawing it down.
A more efficient strategy
Instead of withdrawing thirty-two thousand from the RRSP each year, we modeled a more aggressive strategy. We increased his RRSP withdrawal to sixty-eight thousand dollars per year, bringing his total income to around eighty-seven thousand. This keeps him just under the threshold where Old Age Security starts getting clawed back.
His new tax bill would be higher each year, but the extra after-tax income could be redirected into his TFSA and non-registered account, which are taxed more efficiently and not fully taxable at death.
This simple change improves his estate value
If Mr. RSP were to pass away in 2026 under the new plan, his estate would increase by sixteen thousand dollars. In 2027, the increase would be twenty-one thousand. By 2028, the difference grows to twenty-eight thousand. This extra value may not seem massive, but it’s money that stays in the family rather than going to the CRA.
Final thoughts
If you’re facing a shortened life expectancy and have a large RRSP or RRIF, updating your withdrawal strategy is one of the most effective ways to reduce the tax burden on your estate. It allows you to pay taxes at lower rates today, make use of tax-free and tax-efficient accounts, and leave more behind for your loved ones.
For a deeper look at why aggressive RRSP withdrawals can make sense, visit our website and book an appointment with us.
