Guide
RRSP meltdown: does drawing down early pay off?
An RRSP meltdown draws the RRSP down deliberately in the low-income years between retiring and the age the minimums begin, filling a low tax bracket each year so that less is left to be forced out at a high rate later, or taxed all at once on the final return. It sounds like it should always pay. Two households run every withdrawal order the planner knows, and it pays for one of them.
The short answer
For the Ontario couple, drawing the RRSP down early lowers lifetime income tax by $151,968 and leaves $79,171 more at the end of the plan, compared with drawing the RRSP first at the ordinary pace. Of every order the planner knows, it is the one that leaves the most, so it is the one the planner chooses for this household.
For the single person in British Columbia, drawing the RRSP down early raises lifetime income tax by $9,701 and leaves $121,588 less at the end of the plan, compared with drawing the RRSP first at the ordinary pace. The order that leaves the most is rrsp first, and that is what the planner chooses for this household.
What the meltdown does
Each year the planner withdraws from the RRSP up to the top of a chosen federal bracket, whether or not the household needs the money, and moves what it does not spend into the TFSA and then a taxable account. For the Ontario couple the target is the top of the second federal bracket. The planner searches the targets and keeps the one that leaves the most after tax at the end of the plan.
The Ontario couple
52 and 52, earning $125,000 and $98,000, with $570,000 in RRSPs, retiring at 65.
| Order | Lifetime income tax | Years with OAS clawback | Tax on the final return | Left at the end, after tax |
|---|---|---|---|---|
| Cash, then taxable, then RRSP, then TFSA | $2,101,798 | 23 | $1,359,977 | $5,445,347 |
| RRSP first | $2,113,486 | 22 | $902,987 | $5,751,806 |
| RRSP meltdown | $1,961,519 | 30 | $920,916 | $5,830,977 |
For this couple, drawing the RRSP down early lowers lifetime income tax by $151,968 and leaves $79,171 more at the end of the plan, compared with drawing the RRSP first at the ordinary pace. Of every order the planner knows, it is the one that leaves the most, so it is the one the planner chooses for this household.
The single person in British Columbia
58, earning $90,000, with $420,000 in an RRSP and $530,000 of savings altogether, retiring at 62.
| Order | Lifetime income tax | Years with OAS clawback | Tax on the final return | Left at the end, after tax |
|---|---|---|---|---|
| Cash, then taxable, then RRSP, then TFSA | $320,606 | 0 | $107,763 | $2,081,030 |
| RRSP first | $298,277 | 0 | $34,927 | $2,114,903 |
| RRSP meltdown | $307,977 | 2 | $11,514 | $1,993,316 |
For this person, drawing the RRSP down early raises lifetime income tax by $9,701 and leaves $121,588 less at the end of the plan, compared with drawing the RRSP first at the ordinary pace. The order that leaves the most is rrsp first, and that is what the planner chooses for this household.
Why it pays for one and not the other
The meltdown trades tax now for tax later. It wins when the rate you pay now is well below the rate the money would otherwise face: a large RRSP, a long gap before the minimums, an OAS clawback waiting in the seventies, or an estate that would be taxed all at once. It loses when the low-income years are short or the RRSP is small enough that the ordinary order never reaches a high rate, because then the tax paid early is simply paid early, and the money it came from stops growing tax-deferred. The only way to know which household you are is to run both.
Computed with Retirafy’s engine on the 2025 federal and provincial tables, in today’s dollars. How the projection works.
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