Often called an “RRSP Meltdown” or a “RRIF Meltdown”, a “Meltdown” strategy is, simply put, a tax and financial planning concept for rapidly liquidating a registered investment account. For example, an individual who redeems a significant portion of their registered assets over the course of a few years rather than attempting to ration the funds over their lifetime.
Why would a person decimate their retirement savings on purpose? What would be advantages and disadvantages of a meltdown strategy? Today, we’ll explore why it’s used and when it may be appropriate for your situation.
Registered money has some serious tax and estate implications. If you own some registered investments (RRSPs, RRIFs, LIRAs, etc…), you’re likely aware of the income tax consequences associated with these accounts. Given that they were funded with pre-tax dollars, the time to pay CRA is when you make redemptions. If you pass away with registered investments, and don’t bequeath them to a spouse, the entire pot will be taxed all at once on your final tax return too. This makes strategic planning around withdrawals paramount to keeping more money in your family’s pocket and paying less in tax.
Drawing down on registered money in low income years is ideal. In Manitoba, in 2021, you can earn up to $9,936 without paying a dime of provincial income tax. You can also earn up to $13,808 without paying federal income tax, thanks to Basic Personal Amounts. If you have no other income to report for the year, drawing on your registered assets to maximize these tax breaks is a fantastic tax planning strategy. Better yet, if you don’t need the funds right away, you can stash the cash in after-tax accounts to hold on for another year.
Registered minimums might not fit into your tax plans. If you own registered accounts, you must convert them into income-producing account types (e.g. RRSP converts to a RRIF) prior to the end of the year you turn 71. You must start receiving a minimum income payment the year you turn 72. If you forecast out your retirement income streams and you see a lot of taxable layers: Canada Pension Plan, Old Age Security, a work pension, employment income, etc… AND you tack on large, registered minimums, you could wind up with some tax pain.
So who is a meltdown strategy for? The ideal registered account meltdown is anyone who has accrued registered money and anticipates some years with little-to-no other sources of taxable income. A great example would be a retiree who leaves work at 60, but wants to defer their pensions (CPP, OAS, employment) until 65. From age 60 to 65, they may not have any source of income and their basic personal exemptions would otherwise be wasted. This person could take abnormally large redemptions from their registered accounts over those years to save their future selves from hefty tax bills.
Meltdown strategies aren’t right for everyone. They take careful co-ordination between your Financial Planner and your Tax Accountant to ensure all bases are covered. If a Meltdown strategy is executed properly, you can reduce much of your future tax liability in a smart systematic way! Your future self will thank you.
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