By Graeme Hughes, PFP, for Cutthecrapinvesting
Special to the Financial Independence Hub
Note from Dale Roberts: This is a guest post by invitation, from Graeme Hughes, PFP. Thanks to Graeme, this is a wonderful follow up post to The 3 Most Common Mistakes of Canadian Investors. Over to Graeme …
Canada’s tax and benefits system is a convoluted tangle of programs, rules and exceptions that can be a genuine challenge to navigate. Like all complex systems, having some knowledge of how it works often reveals opportunities to benefit. And as a taxpayer, it only makes sense to ensure that we are accessing all the benefits our tax contributions have made possible.
One of the greatest areas where this type of planning pays off is in structuring our early-retirement income to maximize pension benefits. Here we will be looking at two benefits in particular, the Guaranteed Income Supplement (GIS) and the Canada Pension Plan (CPP).
Accessing the Guaranteed Income Supplement (GIS)
Often, the GIS is viewed as being strictly a benefit for seniors who are living in poverty. However, recent studies show almost a third of Canadian seniors are receiving this benefit, and it can add substantially to your total retirement picture.
The GIS is an add-on payment to Old Age Security (OAS). It provides a maximum monthly benefit of $907.30 for single OAS recipients, and $546.17 each for married and common-law OAS recipient. Benefits are income tested, and clawed back at a rate of at least $1 for every $2 of taxable income for singles, and at least $1 each for every $4 of combined income for couples. The clawback rates are variable depending on total income, and more detailed tables can be found here.
The GIS is a non-taxable benefit, and OAS amounts are not included in the income calculation. Once annual income reaches $18,408 for individuals, or $24,336 in combined income for couples, the GIS benefit drops to zero.
How to maximize the GIS if you have modest savings
Knowing this, if I were a retiree with modest savings and no employer-sponsored pension, I would be tempted to ensure I reached age 65 without any RRSPs. Given the GIS clawback would apply to taxable RRSP withdrawals, the RRSP becomes a very inefficient way to fund additional retirement spending.
For example, if I am a single retiree, aged 65 or older, and I receive 70% of the maximum CPP amount ($808/month), I will be entitled to an additional $363 per month in GIS payments, along with my $607 OAS benefit (assuming 100% OAS eligibility).
While that may not seem like a lot of money, the GIS benefit represents 20% of my total income. For every dollar I take from an RRSP, I am going to lose at least 50 cents of that GIS benefit, and that would be a waste of my precious savings.
However, this clawback does not apply to TFSA withdrawals or withdrawals from non-registered accounts, since they are non-taxable. Keep in mind that in non-registered accounts, any interest, dividends or capital gains that are earned would result in GIS clawbacks, but these would likely be much more minor unless the balances are sizeable.
So for many retirees, it may be beneficial to liquidate their RRSPs prior to age 65, or shortly after 65, and move the proceeds to a TFSA first, with any excess amounts going to a non-registered account. This will maximize the value of the money they have worked hard to save, and optimize their entitlement to government benefits.
Of course, the tax consequences of liquidating RRSPs need to be carefully considered and compared to the GIS benefits likely to be gained. The larger the RRSP balances, the harder this strategy is to justify.
How to benefit from GIS if your Retirement Savings are more substantial
The GIS options become even more interesting for retirees that have larger amounts of savings and limited sources of retirement income outside of government pensions. In this case, appropriately structuring your affairs can provide a real advantage in increasing the longevity of your retirement assets. Continue Reading…