The RRSP Meltdown Strategy: Drawing Down Before You're Forced To

At 71, you must convert your RRSP to a RRIF and start mandatory withdrawals. But consider strategically "melting down" your RRSP earlier, during lower-income years. Here's how it works and why it might save you thousands.

The Problem with Waiting

Many Canadians diligently contribute to their RRSP for decades, then leave the money untouched as long as possible. The logic seems sound: let it grow tax-free longer.

But here's the catch: at age 71, you must convert to a RRIF and start withdrawals. The minimum withdrawal starts around 5.28% at 72 and increases every year. By 80, it's 6.82%. By 90, it's 11.92%.

If you've accumulated a large RRSP—say $800,000—those mandatory withdrawals can push you into higher tax brackets and trigger OAS clawback, right when you have the least ability to do anything about it.

The Meltdown Opportunity

The years between retirement and 71 often represent a "tax valley"—a period when your income is lower than it was during your working years and lower than it will be once CPP, OAS, and RRIF minimums all kick in.

Between 62 and 71, David has significant room in the lower tax brackets. By withdrawing from his RRSP strategically—say, topping up his income to the top of the 20.5% federal bracket—he can shrink his RRSP before forced withdrawals create a tax problem.

How Much to Withdraw?

The goal is to "fill up" the lower tax brackets during your low-income years. Common targets:

• First federal bracket (~$55,000): 15% federal rate
• Second federal bracket (~$110,000): 20.5% federal rate
• OAS clawback threshold (~$90,000): Above this, you lose 15 cents of OAS per dollar

Most meltdown strategies aim to stay below the OAS threshold while using up the lower brackets.

What to Do with the Withdrawals?

You're withdrawing RRSP money and paying tax on it. What then?

• Contribute to TFSA: Effectively converts taxable RRSP money to tax-free TFSA money
• Pay down mortgage: Guaranteed return equal to your mortgage rate
• Non-registered investments: Capital gains are taxed more favourably than RRSP withdrawals
• Living expenses: If you need the money anyway, this just accelerates the timing

When Meltdown Makes Sense

The RRSP meltdown strategy works best when:

• You have a large RRSP relative to your retirement needs
• You expect to be in a higher bracket later (RRIF minimums + CPP + OAS)
• You're at risk of OAS clawback after 65
• You have years of low income before 71
• You have TFSA room to shelter the withdrawn funds

When It Doesn't Make Sense

• Your RRSP is modest and won't trigger high future taxes
• You're already in a high bracket during retirement
• You need maximum growth for longevity protection
• You want to leave the RRSP to heirs (though this has its own tax issues)

How Talk Through Wealth Helps

The meltdown calculation depends on projecting taxes across decades:

• Model different withdrawal amounts each year
• See the lifetime tax difference between meltdown and waiting
• Factor in OAS clawback projections
• Compare scenarios with different longevity assumptions
• Optimize withdrawal amounts to stay in target brackets