The meltdown

  By Guest Blogger Sinan Terzioglu

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The RRSP/RRIF meltdown strategy is based on the premise that withdrawing funds from taxable registered accounts earlier in retirement may result in greater tax efficiency, especially if your current tax rate is lower than the expected tax rate later in life and at death.

This strategy involves borrowing money to invest, generating income in a non-registered account, and using taxable withdrawals from your RRSP/RRIF to pay the interest on the investment loan. In theory, because the loan interest is tax-deductible, it offsets the tax payable on the withdrawal, resulting in no net tax liability.

To illustrate how this strategy works, imagine you withdraw $10,000 from your RRIF, which is your minimum required withdrawal for the year. Since no withholding tax applies, you borrow $200,000 at a 5 percent interest rate and invest the funds in income-generating assets held in a non-registered account. Because the borrowed money is used to earn income, the $10,000 in interest becomes tax-deductible. This allows you to offset the RRIF income with a matching interest deduction, effectively shifting assets from a registered account to a non-registered one on a tax-free basis.

While the strategy may appear appealing, it’s generally unsuitable for most retirees because of the following five key risks and assumptions:

1. Amplified Investment Risk – Using leverage to invest requires discipline and a strong stomach for market volatility. When markets rise steadily over time, leveraged strategies can deliver impressive growth. However, during downturns, losses are amplified and interest on the borrowed funds still accrues. The emotional impact of watching a leveraged portfolio decline can trigger panic selling, locking in losses and defeating the purpose of the strategy.

This approach becomes even risker when the loan is secured against the equity in your home, potentially putting your primary residence at risk. As Warran Buffett cautioned, “It’s insane to risk what you have and need in order to obtain what you don’t need.”

2. Tax Rate Assumptions – The effectiveness of this strategy hinges on tax brackets remaining favourable. The offset works best when your marginal tax rate on RRSP/RRIF withdrawals is equal to or higher than the value of the investment loan interest deduction. But if your income changes, tax rates shift, or you withdraw more than anticipated, the balance can be disrupted. A mismatch between your tax bracket and the deduction could result in a higher-than-expected tax bill.

3. Interest Deductibility Rules – The CRA is explicit: interest on investment loans is only deductible when the borrowed funds are used for income-generating purposes. This means the investments must be structured to produce dividends, interest, or other forms of taxable income. If the loan is used to purchase growth-oriented securities that don’t pay distributions, the deduction may be denied. Many DIY investors overlook this nuance, and a disallowed deduction can undermine the entire strategy.

Additionally, the tax benefits of interest deductibility are often overstated. The deduction only offsets a portion of the interest expense, and its value depends heavily on the performance and tax characteristics of the investments. If returns are weak or the income generated is fully taxable (rather than capital gains), the overall tax efficiency of the strategy can erode quickly.

4. Regulatory and Tax Changes – The RRSP/RRIF meltdown strategy relies heavily on current tax laws and CRA interpretations, particularly around the deductibility of investment loan interest and the treatment of capital gains and dividends. However, tax rules are not static. Future changes to legislation, CRA guidelines, or government policy could significantly alter the effectiveness of this strategy.

5. Cash Flow Complexity – One of the major challenges with the RRSP/RRIF meltdown strategy is managing the timing and consistency of cash flow. To make the strategy work, retirees must coordinate withdrawals to precisely match the interest payments on their investment loan. This requires careful planning and ongoing monitoring.

However, retirement income needs are rarely static. Unexpected expenses, changes in lifestyle, or shifts in market conditions can disrupt the balance. This level of precision adds complexity to retirement planning and may strain cash flow, especially for retirees who rely on their RRSPs/RRIFs for day-to-day living expenses. For most, maintaining flexibility and simplicity in income planning is a safer and more sustainable approach.

 This strategy may be appropriate for a select group of high-net-worth individuals who possess a high tolerance for risk, reliable and substantial cash flow, and a long-term investment outlook. It is most relevant for those who have surplus RRSP savings they do not expect to need during retirement, consistently high taxable income, and significant non-registered assets.

For individuals in this situation, the RRSP meltdown strategy may offer a way to improve tax efficiency without compromising overall financial stability. By shifting assets into a non-registered portfolio that benefits from favourable tax treatment, such as capital gains and eligible dividends, they may be able to reduce long-term tax exposure while continuing to grow their investments.

For most retirees, simpler and more reliable planning strategies tend to be more effective. These include making strategic RRSP/RRIF withdrawal before Canada Pension Plan and Old Age Security benefits begin, using pension income splitting for couples, and delaying CPP or OAS to smooth income and reduce clawbacks. These approaches can deliver comparable or even better tax outcomes without prematurely depleting RRSPs/RRIFs.

In summary, the RRSP meltdown strategy often introduces more complexity and risk than benefit. It relies on unpredictable market performance, intricate tax planning, and long-term assumptions that are difficult to manage over the course of retirement. More importantly, it can compromise financial security at a stage of life when retirees should be focused on preserving capital and minimizing risk.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

Source: https://www.greaterfool.ca/2025/09/21/the-meltdown-2/