5 – The cost of trapping your capital in an RRSP
What We Cover in This Session (starts at 00:00 mins)
This extended session walks through four integrated financial planning strategies, with a central focus on tax planning with RRSPs:
- Understanding marginal vs. average tax rates (03:59)
- The true cost of withdrawing from RRSPs and how government benefits are affected (06:00–09:00)
- A “melting strategy” to withdraw RRSP funds gradually while minimizing tax burdens (09:49–14:24)
- Using permanent life insurance to reposition taxable RRSP money into a tax-advantaged asset (15:06–23:21)
- Comparing legacy outcomes between keeping funds in RRSPs vs. strategic repositioning (16:52–22:46)
Why This Is Important
RRSPs are marketed as tax shelters but can trap your capital, especially at death when they’re fully taxed. Without planning, a significant portion of your RRSP could go to the government rather than your heirs. By shifting money from RRSPs into your own private wealth system, such as a properly designed insurance contract, you can recapture taxes, preserve capital, and increase your legacy.
Key Takeaways
- Marginal tax rates can be much higher than average rates, especially when earning more or withdrawing from RRSPs.
- RRSPs grow tax-deferred, but withdrawals are fully taxable, especially problematic at death.
- Gradually melting RRSPs (e.g., $50K/year over 6 years) and redirecting funds to a whole life policy can:
- Reduce taxes payable
- Grow a tax-free death benefit
- Provide sustainable, tax-free retirement income
- Reduce taxes payable
- Example case (“Peter”) showed a $150K withdrawal plan could generate a $1M tax-free benefit, versus a potential $860K tax bill if left untouched in RRSPs.