Episode 244: Can Your RRSP Be Too Big? (High Income Earners in Canada Beware)

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Are you avoiding your RRSP because you’re afraid it could become a massive tax problem later?

If you’re a high-income earner or incorporated business owner, you’ve probably wondered whether stuffing money into your RRSP today just means paying 50% tax on it tomorrow. Maybe you’ve even held back contributions, thinking you’ll “optimize it later” when you have the perfect plan. But in trying to avoid a future tax issue, you could be missing the bigger risk: not building enough in the first place. Wealth doesn’t grow because you perfectly optimized every detail — it grows because you consistently created bigger “problems” worth solving.

In this episode, you’ll discover:

• Why an “RRSP that’s too big” is usually a sign you’re doing something right — and how to handle it strategically.

   

• How leverage strategies and smart withdrawals can turn a future tax concern into an opportunity to grow even more.
  
• How to think about asset location across RRSPs, corporate accounts, and non-registered investments to maximize flexibility and long-term tax efficiency.

Press play now to learn how to use your RRSP as a powerful wealth-building tool — not something to fear.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 
  

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

A smart Canadian wealth plan starts with clear financial vision setting and understanding how to use the right financial buckets to build long-term wealth in Canada. Whether you’re focused on RRSP optimization, optimizing RRSP room, or balancing salary vs dividends in Canada, true financial independence in Canada comes from aligning personal vs corporate tax planning with smart corporate wealth planning. High-income earners and Canadian entrepreneurs must think strategically about tax-efficient investing, capital gains strategy, and corporation investment strategies, while integrating business owner tax savings, corporate structure optimization, and diversified income streams through passive income planning. Add in real estate investing in Canada, evaluating real estate vs renting, and broader financial diversification in Canada, and you create flexibility for early retirement strategy, modest lifestyle wealth, and meaningful legacy planning in Canada. By leveraging effective retirement planning tools, structured investment bucket strategy, and proven wealth building strategies in Canada, you can design financial systems for entrepreneurs that support sustainable growth, smarter Canadian tax strategies, and lasting financial freedom.

Transcript:

Kyle Pearce: So let’s say you’re making $200,000 a year as a T4 employee. As a T4 employee, you’re earning more than you can earn in RRSP room. We get 18% of our T4 income, but up to a maximum of about $182,000. Ultimately you’re earning more than you can actually contribute.

In a scenario like that, if we let that play out for a second without running the numbers, let’s say that person takes $30,000 a year, $32,000 if we want to be more exact, and puts it into the RRSP. That person at the $200,000 income level is going to get about 45% back of that $32,000.

Now project that out. Let’s say he does this every single year and the salary stays the same. Let’s say the investment does really well. This is where some people get concerned about using the RRSP too aggressively. Let’s say the investments do extremely well, more than 10% a year. Maybe they were a stock picker and something balloons. Now you have this massive RRSP bucket, which is a good problem to have.

This person may find themselves in a situation where they need to start pulling out money earlier than age 71 when they are forced to convert to a RRIF. You want to get some of that money out every year as efficiently as possible. They may never get to a point where they can get out of the highest tax bracket. When they put the money in they were not in the highest marginal tax bracket, and now they are paying the highest tax bracket on withdrawals.

That is a tax issue, but it is a good issue to have. If your RRSP got so big that you felt it was a mistake, the first thing I would do is work with someone you trust and map out whether you should use a leverage strategy to help get some of that money out.

If you have a massive RRSP bucket that creates a tax problem, it almost makes sense to use a leverage strategy. You could borrow against your primary home, borrow against a policy, or borrow against other assets. The interest you pay on the loan could become a tax deduction against money coming out of your RRSP.

Another way to say it is the worse your RRSP problem becomes, the more wealthy you are on paper. But that wealth is not fully real because withdrawals get taxed heavily. The bigger that RRSP number becomes, the more logical it may be to use leverage strategies to extract money in a tax-efficient way while your net worth continues increasing.

This is a perfect example of why the rich often get richer. In order to save tax they end up using leverage, which creates more assets, increases net worth, and compounds wealth over time.

Jon Orr: What you’re saying is that if your RRSP becomes very large, you may not even need it as your main income source. Instead you could use a leverage strategy. If you want to write off the interest on that leverage, the borrowed money needs to be used for income-generating purposes.

You withdraw the minimum from your RRIF and write off the interest because you are using the leveraged money to invest. That means your assets continue growing. You’re not really in a decumulation stage even though the RRSP has converted to a RRIF.

Kyle Pearce: Exactly. This example used a T4 employee. Because RRSP contributions have an annual limit, I actually do not expect many people to find themselves saying their RRSP grew too big. More likely they simply did not realize how much tax they would pay on withdrawals.

Even then, contributing was probably still a good decision because they received the large tax refund when contributing. What matters next is what you do with that tax refund and how you diversify your asset buckets.

For T4 employees the RRSP is usually the first bucket to consider, especially if you are a high-income earner. In many cases it is too good to ignore.

Imagine someone earning $70,000 instead of $200,000. They would contribute much less each year because RRSP room is based on income. They might contribute around $12,000 per year.

If they kept contributing $12,000 every year, their RRSP would only become extremely large if their investments grew dramatically, such as buying Amazon early and holding it for years. In that case their paper net worth becomes massive.

Now they might withdraw RRSP money in a higher tax bracket than expected. Even then, they could look at their other assets and ask whether borrowing against their home to create deductible investment interest makes sense.

Most people will never reach that extreme RRSP problem stage. They may stop contributing earlier or change how they take income. The key is thinking about who should use which strategies.

For T4 employees maximizing RRSP contributions often makes sense.

For incorporated business owners there is more nuance because they control how money leaves the company. They can take salary to create RRSP room or dividends to avoid CPP contributions.

We usually suggest doing some of both. The more retained earnings your company generates each year, the more I encourage people to use RRSPs as well. The reason is simple: you want assets across multiple tax buckets.

The RRSP is a full tax deferral. The corporate account is a partial tax deferral. On the first $500,000 of active business income, tax is roughly 9–12% depending on the province. That is a significant benefit.

Corporate investments also receive capital gains treatment where only half the gain is taxed.

Ideally you would have assets growing inside both the RRSP and corporate or non-registered accounts. That gives you optionality about where to withdraw money from later.

Remember that RRSP withdrawals eventually become mandatory through a RRIF. But if you have other buckets you can shift strategies when needed.

If I knew a particular asset would explode in value, I would place it in my non-registered or corporate account because only half the capital gain is taxed. In the RRSP I might place more stable dividend-paying assets that are still important to my portfolio. In other words, asset allocation may differ across tax buckets.

Jon Orr: You are saying that the reason for that strategy is because you expect growth and potentially high capital gains. In a corporate or non-registered account you only pay tax on part of that gain, while in an RRSP you pay ordinary income tax on withdrawals.

Many high-income Canadians hesitate to contribute to RRSPs. Statistics show that only around 60% of people earning $150,000 to $500,000 are contributing regularly, and the median contribution is around $12,000. People fear putting too much money in because they believe withdrawals will be taxed heavily.

Kyle Pearce: One of the main issues everywhere is volume. The bigger issue is not where money goes, but that people are not investing enough.

Many people are not maximizing their RRSP, not maximizing their TFSA, and not investing in other assets. That is a much bigger problem than worrying about future tax scenarios.

You want to create a tax problem. It means you have accumulated wealth.

Often people try solving problems that do not yet exist. For example, someone considering rental properties may start by researching whether they should open a corporation before even buying property.

Instead, start investing. Create a problem worth solving later.

If you get to a point where you say, “If I had known this earlier I would have structured things differently,” that means you have progressed far enough to have real decisions to optimize.

Jon Orr: That is interesting because many people try solving future problems before they begin. They try optimizing decisions that may become irrelevant later instead of actually taking action.

Kyle Pearce: Exactly. The answer usually lies somewhere in the middle. Start investing, continue learning, and reassess as you grow.

For example, someone with $100,000 invested may debate between two S&P 500 ETFs with slightly different expense ratios. Over decades that difference matters, but the much bigger factor is increasing contributions and growing the account.

Instead of obsessing over tiny differences, focus on earning more and investing more.

Along the way you can monitor checkpoints. If your RRSP grows to $1 million, a basic 4% withdrawal rule would produce $40,000 annually. That alone is not a tax problem unless other income sources push you into higher brackets.

Those checkpoints help you decide when strategies need to change.

Ultimately, people listening to this podcast are learning so they can make better decisions when those moments arrive.

Every strategy requires work. Some may save tax but involve leverage or complexity. Others may be simpler but leave money on the table.

The goal is understanding your options so you can make informed decisions.

Jon Orr: For high-net-worth Canadians and our listeners, the RRSP bucket is not dead. Do not treat it that way.

Think of it as an optionality bucket that creates opportunities for future strategies. There are ways to manage tax liabilities with creative planning.

This is the work we do every day when helping people structure retirement and optimize tax strategies.

If you think your RRSP might be too large, reach out to us. There are strategies available to optimize how that bucket is used.

You can connect with us at CanadianWealthSecrets.com/discovery.

Kyle Pearce: If you want to understand where you are on your wealth-building journey, visit CanadianWealthSecrets.com/pathways and complete our short assessment.

This show is for informational purposes only. Nothing discussed should be considered legal, tax, accounting, investment, or insurance advice.

I, Kyle Pearce, am a licensed life and accident and sickness insurance agent in Ontario and other provinces across Canada.

If you are looking for help managing your assets, you can reach out and be connected with our team of wealth managers.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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