Q&A: RRSP ‘meltdowns’

Question: Neither my husband nor I have registered pension plans
to look forward to at retirement, so we have been maxing out our RRSPs for the
past 20 years or so. We have been told that leveraging to melt down our RRSPs,
before age 65, would be a good idea to avoid paying the full amount of tax on
the RRSP income. I don’t agree, but my husband is leaning in that direction
– what do you think about leveraging in this situation? – Nelly, NL

Gordon Pape answers: I think it is a questionable strategy.
Essentially, what it boils down to is taking out an investment loan, on which
interest payments will be tax-deductible. The interest deduction is then used
to offset the tax due on the RRSP withdrawals. You aren’t reducing the
tax on the RRSP money at all — you’re simply balancing the income
with a deductible expense.

However, the interest on the loan will still cost you money, after tax. And
any income or capital gains earned in the non-registered portfolio will be taxable.

As a general rule, I recommend that people avoid leveraged arrangements like
this because they can be complicated and, if not carefully handled, result in
a net financial loss. Also, the only person who is certain to come out ahead
is the advisor who collects the fees and commissions on the leveraged account.

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