We’re Set for Life: Should We Cash Out Our RRSP?

When should retirees cash out their RRSPs?

Randy, the scenario you describe is common: good defined benefit pensions, other government retirement income, and an individual RRSP balance that you’re considering liquidating. The key question is what financial outcome you hope to achieve by converting your RRSP to cash now versus leaving it to become a RRIF and taking the required withdrawals later.

First, it helps to distinguish what happens to different retirement income sources on death. An RRSP left in your name that names your spouse as successor or beneficiary can transfer to her without immediate tax consequences. Old Age Security (OAS) is an individual benefit and does not transfer; when the OAS recipient dies, the payment stops. Canada Pension Plan (CPP) survivor benefits can increase a surviving spouse’s CPP up to the maximum, and there is a one-time CPP death benefit (often cited at around $2,500). Your defined benefit pension may provide a survivor pension — in many plans the survivor receives a percentage of the member’s pension, though the exact amount depends on your plan’s rules. Becoming single also affects tax credits, income splitting opportunities and eligibility for certain income-tested benefits like OAS, and those changes apply whether a spouse dies before or after age 71.

Withdrawing from an RRSP before age 70

If your objective is to remove the RRSP/RRIF as a potential source of income for your wife after you die — for example to avoid increasing her taxable income and triggering an OAS clawback — then converting the RRSP to cash and spending or re-holding the proceeds makes sense in theory. One practical way to approach this is to convert the RRSP to a RRIF so you can take withdrawals and, importantly, split pension income with your wife while you’re both alive; RRSP withdrawals cannot be pension-split but RRIF income can be.

As an example, if you want to exhaust roughly $200,000 plus expected investment growth within five years, you would need annual withdrawals in the ballpark of $45,000. At the same time, you could delay taking OAS, which increases by 0.6% per month (about 36% if delayed from 65 to 70) and is indexed for inflation. Delaying CPP is another consideration: CPP increases by 0.7% per month of delay, which can lead to a significant increase if you postpone receipt to age 70.

Draining the RRIF over a short period would eliminate it as an asset that could later transfer to your wife and potentially reduce the chance she faces an OAS clawback because of added RRIF income. That could accomplish the goal you describe, but it’s important to consider the trade-offs and the tax consequences of large withdrawals today.

Consequences of accelerated withdrawals from a RRIF

Large, accelerated RRIF withdrawals are taxable in the year they’re taken. Using a rough estimate for Ontario, a $45,000 taxable RRIF withdrawal might leave about $28,451 after tax to reinvest or spend. That means instead of keeping $45,000 growing tax-deferred inside a registered plan, you’d have a smaller after-tax amount working for you outside the plan. Ideally, if you have contribution room, you could shelter that after-tax money inside a Tax-Free Savings Account (TFSA); otherwise you would invest in a non-registered account where interest, dividends and capital gains are taxable as they occur, and probate may still apply to any remaining assets at death.

If your intention is to spend the RRSP funds on travel, leisure or other life experiences while you’re relatively young and healthy, that is a valid and common choice. Many retirees with secure defined benefit pensions prefer to use their RRSP savings for enjoyment in early retirement, accepting that their ongoing pension and possible later life events (such as downsizing a home) will provide support later in life.

Alternatively, you might choose a measured approach: withdraw only what you need while delaying OAS and perhaps CPP. For instance, if at age 72 your RRIF still sits near $200,000 and the mandatory minimum withdrawal is around $10,800, splitting that income with your wife might keep both of you below thresholds that would trigger OAS recovery. In that case, the RRIF remains an estate asset that could still transfer to your spouse on death, which has its own implications for her taxes and benefits.

Stop trying to predict the future and enjoy your money

There’s no single “correct” answer here. The optimal move depends on a blend of financial calculations and life preferences. Some planning strategies you read about — income averaging, aggressive early withdrawals to minimize later taxes, and so on — can sound compelling but their benefits are sensitive to many variables: investment returns, inflation, longevity, health, tax rules and survivor provisions. Getting a precise outcome typically requires dedicated planning tools and a clear view of your goals.

If your priority is to enjoy retirement now — to travel, make memories and spend confidently — liquidating a portion of the RRSP and using the money for those purposes can be entirely reasonable, especially when your pensions already cover the income you need. On the other hand, if preserving estate value and keeping income tax and entitlement calculations favorable for a surviving spouse are top concerns, a more conservative course of leaving the RRSP invested and converting it to a RRIF later may be preferable.

Ultimately, the best approach is the one that aligns with what you truly want from retirement. Consider running scenarios with a trusted planner or using retirement planning software so you can see likely outcomes under different assumptions. Then choose the strategy that matches your financial goals and your life priorities.

Read more: Ask a Planner

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