Your RRSP may be too big
Tax risks and withdrawal strategies
January 19, 2026
You and your spouse have been disciplined savers and have built up a significant amount in your Registered Retirement Savings Plan (RRSP). You may also have a defined benefit pension plan. By all accounts, you’re in a fantastic position to enjoy retirement.
There is, however, a potential long-term issue.
When you convert your RRSP to a Registered Retirement Income Fund (RRIF), the mandatory annual withdrawals are considered taxable income and are stacked on top of other income sources like:
- Defined benefit pension
- Canada Pension Plan (CPP)
- Old Age Security (OAS)
- Investment, interest, and rental income
- Continued income from employment
This "income stack" can easily push you into the highest tax brackets and introduce three significant risks that can erode savings.
1. The annual OAS clawback
Once your individual net income exceeds a certain threshold ($95,323 for 2026), the government claws back your OAS payments at a rate of 15 cents for every dollar of income over that limit. This effectively increases your marginal tax rate by 15% on all earnings in that range.
2. The survivor's trap
Most financial plans project both spouses living to age 90 or 95. But what happens if one spouse passes away early into retirement? While the deceased’s RRIF can roll to their spouse tax-free, the survivor is left with:
- Their own pension, CPP, and OAS
- A potentially sizeable combined RRIF
While mandatory withdrawals remain roughly the same in total, they are now reported by only one person. This almost guarantees the survivor will be pushed into a higher tax bracket, and also heightens the potential for OAS clawbacks.
3. The estate nightmare
Upon the passing of the second spouse, the entire remaining RRIF balance is counted as income on the final tax return. If both spouses pass away earlier than expected, the remaining balance could be sizable and mostly subject to the highest marginal tax rates. This can easily trigger a 40–50% tax bill.
What to Do?
Pre-retirement planning
Remember that RRSP contributions are advantageous if you expect the tax break on contribution to at least equal the tax rate you pay upon withdrawal. For the reasons noted above, if you already have a large RRSP and aren't in a high tax bracket, continuing to contribute to your RRSP might not be your best move.
In retirement: the proactive drawdown strategy
Many people make the mistake of waiting until they’re forced to take money out of their RRIF at 71. By doing this, they miss the opportunity to withdraw money from their RRSP at relatively low tax rates in their early retirement years.
If you have a large RRSP, the goal is to smooth out your lifetime tax bill by strategically withdrawing funds during your "golden window,” the lower-income years between early retirement (i.e., ages 60 to 65) and 71.
What it involves:
- Strategic RRSP withdrawals: We help determine the optimal amount to withdraw each year to "fill up" the lower tax brackets.
- A shift to a TFSA: You can move the after-tax money into your Tax-Free Savings Account (space permitting), where it can continue to grow and be withdrawn tax-free.
In retirement: income splitting
If you and your spouse have a sizeable difference in your RRIF balances, income from eligible RRIF withdrawals and pension plans can be split 50/50. This may allow you to withdraw more aggressively from your RRIF accounts while still keeping both spouses incomes at an optimal level.
Hedging vs. hoping
Ultimately, you have a choice. You can leave these tax outcomes to chance or adopt a proactive strategy to safeguard against major tax risks. A proper plan gives you and your family control over the savings you've spent your life building.
