The Problem Most Canadians Discover Too Late
Most high-income Canadians spend their working years diligently contributing to their RRSP, accumulating a substantial balance that feels like financial security. Then retirement arrives, and a harsh reality sets in: every dollar withdrawn from an RRSP is fully taxable as ordinary income.
For a professional who retires with a $1,000,000 RRSP balance, the tax implications are staggering. At age 71, the government mandates conversion to a RRIF (Registered Retirement Income Fund), with minimum withdrawal rates starting at 5.28% and rising each year. By age 80, the minimum withdrawal rate reaches 6.82%. By age 90, it climbs to 11.92%.
The result? A retiree with a large RRSP balance may find themselves in a higher tax bracket in retirement than during their working years — the exact opposite of what RRSP planning was supposed to achieve.
Understanding the RRIF Forced Withdrawal Problem
When you convert your RRSP to a RRIF at age 71 (the mandatory deadline), the government requires minimum annual withdrawals based on your age. These withdrawals are fully taxable.
| Age | Minimum RRIF Withdrawal Rate |
| 71 | 5.28% |
| 72 | 5.40% |
| 75 | 5.82% |
| 80 | 6.82% |
| 85 | 8.51% |
| 90 | 11.92% |
| 95+ | 20.00% |
The OAS Clawback Trap
The Old Age Security (OAS) clawback is one of the most painful tax surprises for retirees with large RRSPs. In 2025, if your net income exceeds $90,997, you begin repaying OAS at a rate of 15 cents for every dollar above the threshold. OAS is fully clawed back at approximately $148,000.
For a retiree receiving $8,500 in annual OAS benefits, losing the entire amount to clawback represents a 15% effective tax surcharge on income between $90,997 and $148,000 — on top of regular federal and provincial income taxes. The combined marginal rate in this income range can exceed 60% in some provinces.
The RRSP meltdown strategy directly addresses this problem by reducing the RRIF balance before forced withdrawals push income into clawback territory.
The RRSP Meltdown Strategy: Core Mechanics
The meltdown strategy involves making systematic RRSP withdrawals during the years between retirement and age 71, at tax rates lower than what you would face under forced RRIF withdrawals. The goal is to "melt down" the RRSP balance to a level where mandatory RRIF withdrawals will not trigger OAS clawback or push you into the highest tax brackets.
The optimal window is typically ages 55–71, when many professionals have retired or reduced their income but have not yet begun CPP, OAS, or mandatory RRIF withdrawals.Step 1: Calculate Your Target RRIF Balance
Work backward from your projected retirement income needs. If you expect CPP of $12,000, OAS of $8,500, and pension income of $20,000, your total guaranteed income is $40,500. To stay below the OAS clawback threshold of $90,997, your RRIF withdrawals should not exceed approximately $50,000 annually.
At the age-71 minimum withdrawal rate of 5.28%, a $50,000 annual withdrawal corresponds to a RRIF balance of approximately $947,000. If your projected RRSP balance at age 71 exceeds this amount, a meltdown strategy is warranted.
Step 2: Determine the Optimal Annual Withdrawal Amount
The ideal annual withdrawal fills your lower tax brackets without triggering clawback or pushing you into higher rates. For most retirees, this means withdrawing enough to bring total income to approximately $80,000–$90,000 annually during the meltdown period.
In 2025, the federal tax brackets are:
- 15% on income up to $57,375 - 20.5% on income from $57,375 to $114,750 - 26% on income from $114,750 to $158,519Provincial rates vary, but the combined federal-provincial marginal rate at $80,000 is typically 33–40%, compared to 45–55% at higher income levels.
Step 3: Redirect Withdrawals to TFSA
This is the critical step that transforms a tax-deferral strategy into a tax-elimination strategy. RRSP withdrawals are taxed, but the after-tax proceeds can be contributed to a TFSA, where they grow tax-free and can be withdrawn tax-free in retirement.
A professional who withdraws $50,000 from their RRSP annually for 10 years, pays $15,000 in tax (30% effective rate), and contributes the remaining $35,000 to their TFSA will have accumulated a substantial tax-free pool. Future withdrawals from this TFSA do not count as income for OAS clawback purposes.
Step 4: Consider Investment Loan Coordination
For professionals with significant non-registered investment portfolios, an investment loan can be used to replace the income "lost" during the meltdown period. The interest on investment loans is tax-deductible, which further reduces the effective tax rate on RRSP withdrawals.
Case Study: The Difference a Meltdown Strategy Makes
Consider two engineers, both retiring at age 60 with identical financial profiles:
- RRSP balance: $900,000
- Projected CPP at 65: $12,000/year - Projected OAS at 65: $8,500/year - No other pension income Without Meltdown Strategy: Engineer A makes no RRSP withdrawals until forced RRIF conversion at 71. By then, investment growth has increased the balance to approximately $1,350,000 (assuming 3% real growth). Minimum RRIF withdrawal at 71: $71,280. Combined with CPP and OAS: $91,780 — just above the OAS clawback threshold. By age 80, RRIF withdrawals alone exceed $92,000, triggering full OAS clawback and pushing marginal rates above 50%. With Meltdown Strategy: Engineer B withdraws $45,000 annually from ages 60–71, paying approximately $12,000 in tax each year (effective rate ~27%) and contributing $33,000 to TFSA. After 11 years, the RRSP balance has been reduced to approximately $650,000, and the TFSA holds $363,000. At 71, minimum RRIF withdrawal is $34,320 — well below the OAS clawback threshold. Total lifetime tax savings: $180,000–$240,000.Spousal RRSP Considerations
If your spouse is in a lower tax bracket, a spousal RRSP meltdown can be even more effective. Withdrawals from a spousal RRSP are taxed in the spouse's hands (subject to the attribution rules), potentially splitting income and reducing the combined household tax burden.
The attribution rules require that spousal RRSP contributions not be withdrawn within three calendar years of the contribution. Proper planning ensures withdrawals are attributed to the lower-income spouse.
When the Meltdown Strategy Is Most Valuable
The RRSP meltdown strategy delivers the greatest benefit when:
1. Your projected RRIF balance at 71 will generate withdrawals above $50,000–$60,000 annually — pushing income into OAS clawback territory.
2. You have a gap between retirement and age 71 — the longer the meltdown window, the more effective the strategy. 3. You have TFSA contribution room available — the ability to shelter after-tax proceeds from RRSP withdrawals is essential to the strategy's effectiveness. 4. Your spouse is in a lower tax bracket — income splitting through spousal RRSP withdrawals amplifies the benefit.The Bottom Line
The RRSP meltdown strategy is not about avoiding taxes — it is about paying taxes at the lowest possible rate over your lifetime. The government will eventually tax your RRSP; the only question is whether you control the timing and rate, or whether mandatory RRIF rules force withdrawals at the worst possible time.
For a professional with a $500,000+ RRSP balance, a properly executed meltdown strategy can reduce lifetime taxes by $150,000 to $300,000. That is not a minor optimization — it is a fundamental component of comprehensive retirement planning.
The optimal strategy depends on your specific income projections, provincial tax rates, CPP/OAS timing decisions, and estate planning goals. A qualified financial planner can model multiple scenarios and identify the withdrawal schedule that minimizes your lifetime tax burden.