The Myth of the “Too-Large RRSP”

Every few months, social media decides the RRSP is a terrible idea. The latest version? “Don’t grow your RRSP too much or you’ll get crushed by taxes in retirement.” The reality is less dramatic. A large RRSP isn’t a tax trap – it’s a planning opportunity, if you know when and how to draw it down.

Myth vs. Fact

Myth: Most people end up in a higher tax bracket in retirement, so you shouldn’t max out your RRSP.

Fact: The vast majority of Canadians retire in a lower tax bracket, thanks to income splitting, CPP and OAS deferral options, and the flexibility to draw down RRSPs strategically before age 71. The issue isn’t the size of your RRSP – it’s how and when you withdraw from it.

It seems everywhere you scroll these days there’s a short reel or post screaming: “If you keep maxing your RRSP, at age 71 the government forces you to withdraw massive sums and you’ll be back in a high tax bracket!” “Most people won’t be in a lower tax bracket in retirement, so your RRSP is a ticking time bomb!” “The RRSP trap nobody warns you about!”

You may have seen something like this: someone with a $1.5 million RRSP at age 65, then at 71 they must withdraw about $79,500, pay roughly $31,800 in tax (40%), and suddenly they’re “back in a high tax bracket.”

The screenshot gets shared, alarms go off, and the message spreads fast. But this is highly misleading. The problem isn’t a big RRSP. The problem is poor timing of withdrawals and not using all the tax tools available to you.

Let’s walk through the myth, what these posts are really describing, and how proper planning turns this supposed “trap” into an advantage.

What the claim says

Here’s what the “large RRSP equals big trouble” narrative says: when you reach age 71, you must convert the RRSP to a Registered Retirement Income Fund (RRIF) and start taking minimum withdrawals.

Because your RRSP has grown large, the mandatory withdrawals are large too. Big withdrawals mean high taxable income and, therefore, a high marginal tax bracket in retirement.

The argument continues that most people won’t be in a lower tax bracket in retirement than they were while working, so RRSP contributions simply defer tax – you’ll pay it all later, possibly at higher rates.

That sounds convincing on the surface, especially with a scary spreadsheet. But it skips the most important part of the story.

The real issue: timing and sequence

The real trigger isn’t the size of your RRSP – it’s the window between retirement and age 71, and how you use it.

When you retire, your employment income disappears – usually your highest-taxed source of income. That creates a “golden window” between retirement and age 71 to draw from your RRSP at relatively low tax rates.

Withdrawing strategically during these years reduces your RRIF balance later, keeps future minimum withdrawals manageable, and smooths out taxes across your lifetime.

Waiting until 71 or later to start large withdrawals can cause a collision of income sources: CPP, OAS, RRIF minimums, and investment income – all stacking in the same year and pushing up your marginal tax rate.

In short, it’s not a large RRSP that creates a tax problem – it’s waiting too long to draw it down.

Why “most people retire in a higher tax bracket” is false

This one refuses to die, so let’s tackle it with data.

According to Statistics Canada, just 8.3% of Old Age Security (OAS) recipients are affected – fully or partially – by the OAS clawback.

That clawback starts around $93,454 of net income, roughly the top of the largest “middle-class” marginal tax bracket (29.65 percent in Ontario).

If only 8% of retirees are in that range, the vast majority of Canadians are not retiring into higher tax brackets. Here’s why:

• Employment income disappears, which alone drops most people into a lower bracket.
• RRSP and RRIF withdrawals are flexible – you control how much you take (within the minimums).
• Income splitting helps – RRIF, pension, and annuity income can be split 50/50 with a spouse starting at age 65.
• CPP and OAS can be deferred to age 70, which raises guaranteed income later while keeping taxable income lower in your 60s.
• TFSAs and non-registered savings provide flexibility – withdrawals are tax-free and can be used to top-up spending without increasing taxable income.

For most well-planned couples, retirement income is comfortably within a lower tax bracket than during their peak earning years.

When a large RRSP can actually be a problem

There are two scenarios where the “RRSP trap” idea has some truth to it.

First, singles with no income-splitting options. If you’re single, every dollar of RRIF income stays in your own tax return. That can lead to higher effective rates, especially if you have investment income or rental income on top of withdrawals. Without income splitting, your ability to control your marginal rate is limited.

Second, those who keep working past 70. If you continue earning into your 70s, your employment or business income overlaps with mandatory RRIF withdrawals and government benefits. That’s where income stacking becomes an issue – and where the “tax trap” visuals come from.

But again, many of these are edge cases. For the majority, smart withdrawal planning prevents the problem entirely – even for singles!

What to do instead: turning the RRSP into a planning tool

Here’s a practical playbook. Retire first, withdraw second.

Once you stop earning, use those early retirement years to withdraw from your RRSP at modest tax rates. Start withdrawals in your 60s to reduce your future RRIF balance and smooth taxes.

Delay CPP and OAS to 70 to defer taxable income and boost future guaranteed benefits.

Split income wherever possible – RRIF and pension splitting can cut your household tax bill dramatically.

Use your TFSA and non-registered accounts strategically to fund spending without pushing up taxable income.

Plan your drawdown order, focusing on RRSP and RRIF withdrawals first, then moving to non-registered and TFSA accounts (if necessary).

And keep tabs on RRIF minimums by modelling future withdrawals to avoid surprises later.

Final thoughts

The viral videos warning about a “too-large RRSP” make for great clicks, but bad advice. Think critically – does this apply to me and my situation?

The real problem isn’t the RRSP, it’s ignoring your drawdown plan until age 71.

You can absolutely build a seven-figure RRSP and retire comfortably in a modest tax bracket if you take advantage of the early withdrawal window and coordinate with CPP, OAS, and income splitting.

In the end, an RRSP isn’t a trap. It’s one of the most effective tax-planning tools Canadians have – when used intentionally. The only real danger is letting social media scare you out of using it properly.