Posted By 
By Patrick McKeough, TSInetwork.ca
Special to the Financial Independence Hub
Investment tip: “RRSP meltdown strategies promise to ease your tax burden on withdrawals, but these complicated manouvres are usually more lucrative for brokers than for investors.”
Investors sometimes ask us what we think of the so-called “RRSP meltdown.” This is a strategy that would let them make withdrawals from their RRSPs without paying income tax.
How the RRSP meltdown works
When you take money out of your RRSP, you have to pay tax on your withdrawal at the same rate as ordinary income in the year you make the withdrawal. However, under an RRSP meltdown strategy, you would offset the additional tax by taking out an investment loan and making the interest payments from funds you withdraw from your RRSP (the withdrawals must be equal to the interest payment).
Since the interest on the loan is tax deductible, the tax on the RRSP withdrawal is cancelled out. This, in theory, results in zero tax owing on your withdrawal.
You can then use the investment loan to buy dividend-paying stocks, which you would use to provide income during retirement. Dividend-paying stocks also have the advantage of being very tax efficient.
