Episode #9: I Wish I'd Never Bought RRSPs

In this episode of the Retirement IQ Podcast, retirement wealth coach John Springer tackles a concern he hears all the time from friends and family: “I wish I’d never bought RRSPs.” That frustration usually comes from the shock of paying tax when RRSP money is withdrawn. In this episode, John sets the record straight and explains why RRSPs are not the problem — poor planning is.

John walks through how RRSPs are designed to work, from tax-deductible contributions during high-earning years to tax-deferred growth over time. He explains what happens when RRSPs must be converted to a RRIF by age 71, why mandatory withdrawals can create higher taxable income, and how this can often be avoided with the right strategy.

The conversation covers smart planning techniques such as drawing down RRSPs earlier in retirement, using spousal RRSPs to split income, and coordinating RRSP withdrawals with the timing of CPP and OAS. With practical examples and clear guidance, this episode shows how thoughtful RRSP planning can significantly reduce lifetime taxes — and why, when used correctly, RRSPs remain one of the most powerful tools in a well-built retirement income plan.

Transcript

Retirement IQ Ep.9

John Stregger: 00:09.158 - 13:23.913

Hey everyone, welcome to another episode of Retirement IQ, a podcast dedicated to helping you answer the burning questions you've got about all things retirement planning. I'm your host, John Stregger and if you've been listening to our show lately, you'll know that we've recently been talking about topics around OAS, CPP, and pension plans. Now, a lot of those income plans are widely out of your control when it comes to how you get income. However, when you invest in your own accounts like RSPs, you do possess a fair degree of control. So today I want to shift gears a little bit and talk about the ins and outs of RSPs and set the record straight on how to best use your RRSP. So sometimes when I'm in conversation with clients and friends, I hear a lot of people complaining about the taxes that they're going to have to pay when they take out money from their RRSP account. I hear things like, you know what? I never would have put money into my RRSP if anyone told me I was going to have to pay a boatload of tax when I retire. Or, hey, aren't RRSP's just a big tax trap? Over half of it is going to go to the government when I pass away. So today, I thought it would be great to maybe just talk a little bit about why that tax is being paid, why it's due, and where the true advantage lies in your RRSP. So before we jump into that, just to remind everyone what an RRSP is, it's basically an investment vehicle designed for retirement savings and ultimately your retirement income. So how it works is that when you put that money into your RRSP, you get a deduction from your income. So if you make $100,000 and you put $10,000 into your RRSP this year, you get to deduct $10,000 from your income, meaning that your taxable income is now going to be $90,000. That's great news when you're in your high income earning years, right? You make money in high tax years and you have the opportunity to invest and delay paying tax on that income to a future year. So you will pay tax on that money when you withdraw it down the road. You just hope that it's in a lower tax rate than you are today. Now it's also important to know that eventually your RRSP will likely turn into a RIF when you go to take that income at retirement. By the way, a RIF is basically an RRSP that is designed to pay you income during retirement. So to reframe the concept, the idea is that when you are in your high income earning years, you're going to take that contribution and essentially pay no income tax on that income, which you redirect to your RRSP. Not to mention, once that money gets into your RRSP account, it's going to be invested and grow totally tax deferred. So you pay no tax on interest, dividends, capital gains, while that money is inside the account. And once you get to retirement and withdraw your money from your RRSP, most people are going to find that they are in a lower tax bracket than when they were when they made the contribution to their account. By the way, you should also know that the way RRSP rules are set up is that after you turn 71, you have to convert your RRSP money to a registered retirement income fund, a RRIF. And there's also a minimum amount of income that you have to take out of your RRIF, which is based on the total value of that account. This is automatically gonna create taxable income which you may or may not need when you turn 71. This is important because you don't have to wait until 71 to start taking money out of your RRSP. If we plan to intentionally withdraw money from your accounts before you get to 71 and get your RIF balances a lot lower by the time you are 71, the minimum amount that you will have to take out will be a lot less, which could mean a lot less tax to you. Now, if we take this a step further and talk about your estate planning, same thing. We want to deplete those accounts early on in retirement because once you and your spouse pass on, whatever is left in your RIF accounts, it's gonna be fully taxable. If you can plan to withdraw that money during your living years, you will likely pay far less tax than deferring it all to the end. One thing to keep in mind about your RSPs is if you look at the total value of your RSP accounts, if you look at your statement, you have never paid a penny of tax on any of that money. And it's also gonna keep growing tax deferred until you have the opportunity to take it out in retirement, when you're probably gonna be in a lower tax bracket. So while it's always painful to pay tax on those withdrawals from your RRSP, looking at it through the lens of being a lifetime investment, the total return on your RRSP contributions is still an amazing deal when you're looking at it from the perspective of a lifetime tax bill. Another proactive strategy which we should talk about when making RRSP contributions is looking at spousal RRSPs. If you're a couple and if you're a higher income earner between you and your spouse, you have the option of contributing money into a spousal RRSP in your spouse's name. What that allows you to do is get a tax deduction for your contribution, but the actual investment money goes into your spouse's name. That's gonna benefit the two of you because when your spouse withdraws that money at retirement, it's gonna be taxed in their name and you can income split easier. When we pay taxes in Canada, our tax bill is calculated based on your individual income. For that reason, you want to be forward thinking with your RRSP balances in both you and your spouse's name so that you can take advantage of all the lower income tax rates available to you. Now, while there are some CRA rules that allow you to split RRIF income with your spouse, we can only potentially do that after age 65. So that's where a spousal RSP will actually come in handy and help you do any kind of income splitting you need to do before you get to 65 when those rules kind of loosen up around that. The ability to income split can be a major advantage at reducing your combined income tax bill at retirement. So you should look at how spousal RSPs might help in that goal. So to quickly summarize the spousal RRSP advantage, if during your working years, one of you are in a higher income tax bracket, it probably didn't work out well for you from a tax perspective, because the higher income earner was paying a lot more tax than the lower income spouse. But now, in retirement, we can actually combine your RRSP income and split the income to reduce your family's overall tax bill. So the reality is, especially for married or common law couples, is that by putting money into RRSPs while you're working and in those higher income earning years, you are likely going to pay a lot less lifetime tax than if you were just putting the money into a non-registered account and letting it grow and paying tax along the way and using that money at retirement. Another thing I do want to talk about was just kind of getting clear on how you should be properly using RSP accounts, especially when you make your contribution. When people make a contribution, they get that tax deduction and they ended up getting some kind of tax refund that tax time. Most people, they treat that refund as found money and they use it towards things like vacations or just personal enjoyment. To really get the full impact of your RRSP contribution, that refund should really be used towards building wealth. It could be paying down your mortgage or putting it in a tax-free savings account. Or even better yet, put that refund into your RRSP for next year. So you get an even bigger advantage the following year. You can kind of get that cycle going. So you're paying less and less tax on an ongoing basis. But if you do get a refund and you end up spending the whole refund, it kind of negates the whole idea of that tax deduction. Now you've taken the tax deferral advantage away. So what can you do at retirement to further lessen your tax bill? Once we do stop working and get into retirement, there are some things that we're able to do to try and limit the taxes that you're gonna have to pay. Firstly, instead of taking CPP and OAS as soon as you're eligible, There's a lot of advantage, and we've talked about this in the past, around delaying those pensions to age 70 so we get higher guaranteed income for life. By delaying those programs, that's also going to give us a lower taxable income in those early retirement years before age 70. This is gonna give you a window of opportunity to withdraw money from your RRSP or RRIF at a lower tax rate compared to waiting in a later year. We can intentionally look at actually draining your RRSP accounts and bringing them down while we're in an otherwise much lower tax bracket. than we will be once those government programs kick in. It doesn't mean that you have to spend that money that you withdraw from these accounts. It's just a way of tax planning and paying less tax on that RRSP income. This is one way we can be getting a lot more after-tax money out a lot quicker and potentially at a lower tax bill. Now, maybe the other thing I would add is even when you're taking government benefits, whether it's before age 70 or after, is you should be leveraging your tax brackets. So if you're running some tax projections and where you might be for the year and for future years, you might find that you're hitting onto another tax bracket. You might be able to take an extra five or 10 or $15,000 of income out before you hit the next tax bracket up. Now, assuming you're in a lower tax bracket, it might be beneficial to take those additional withdrawals to ensure that you pay tax at a lower rate than in the future. Now, if you are going to employ this strategy, the one thing you'll want to look out for is taking additional income that could potentially impact your old age security income in the form of a clawback, which is at $93,000 for 2026. Spreading income over $93,000, it will start to reduce your OAS, which may be an unintended result. These are just a few of the ideas we can look at for trying to get more money out of your registered accounts without getting killed on taxes. But at the end of the day, when you consider that you've never paid a dime of tax on any of the money that's sitting in your RRSP accounts, and you'll be taking it out at retirement when you're probably in a lower tax bracket, it's not a bad deal. You'll no doubt pay some tax, but the good news is that with a little bit of tax planning, there are ways to minimize your tax bill. Tax planning is definitely an area of retirement planning that gets overlooked by most people. It's an area where you can exercise a lot of control and benefit greatly from. It takes a bit of work to go through, but the financial results can be amazing. If you want to learn more about these concepts, go to freeretirementreport.ca. We offer a free assessment of your situation, and we employ many of the concepts which we talk about here on a regular basis. That address again is freeretirementreport.ca. I really hope you're enjoying the show, and until we meet again on our next episode, I'm John Stregger, and thank you for listening to Retirement IQ. Have a great day, everybody.

Female Narrator: 13:35.016 - 13:52.027

The information provided in this podcast is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax, or other professional advisors.