Retired Money: Some upsides of inflation for retirees

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My latest MoneySense Retired Money column looks at one unexpected upside of inflation; the government’s indexing to inflation of tax brackets, retirement savings limits and OAS thresholds. You can find the full column by clicking on the link here: Inflation a scourge for retirees? Ottawa’s silver lining(s)

TFSA room rises to $7,000

Fans of the popular Tax-free Savings Account (TFSA) will experience this as early as Jan. 1, 2024, when the annual maximum contribution room rises to $7,000, up from $6,500 in 2023. As of January 2024, someone who has never before contributed to a TFSA now has cumulative contribution room of $95,000.

In November Kyle Prevost’s weekly Making Sense of the Markets column included an item titled Make inflation work for you.  “We shouldn’t ignore or discount the more advantageous aspects of inflation, such as increased government benefits and more contribution  room in our RRSPs and TFSAs.”

Prevost linked to a spreadsheet posted on X (formerly Twitter) by financial advisor Aaron Hector, posted late in October, after the CPI announcement that Ottawa’s official inflation indexing rate for 2024 would be a sizeable 4.7%. While below 2023’s 6.3% indexation rate, it’s well above 2022’s 2.4% and 2021’s 1%.

Also quoted in the MoneySense column is Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “One of the main benefits is paying less taxes.” Income tax brackets increase with inflation each year. For example, in 2021 the lowest tax bracket in Ontario ended at $45,142 of income. “Starting in 2024, this lowest tax bracket now ends at $51,446. This is a 14% increase over just a few years.”

This also provides more flexibility in tax planning strategies like the RRSP meltdown. Ardrey says a retiree can draw more from their RRSP in a given year and still remain in the lowest tax bracket. “This can also benefit someone with a personal corporation who is pulling out income in retirement. They can take more from the corporation without increasing their taxes payable.”

RRSP limits rise

Inflation also influences RRSP maximum contribution savings limits. In 2021 the limit was $27,830. For 2024, it is $31,560, a difference of 13.4%. Over a similar time period, 2018 to 2021, it rose from $26,230 to $27,830, a difference of 5.7%. “Thus, recent inflation caused the RRSP limit to more than double over a similar time period,” Ardrey concludes, “This of course can increase your tax deferred savings and also your annual tax deduction for your RRSP contribution.”

OAS clawback threshold rises

Among the goodies that will appeal to retirees is the rising threshold where retirees may encounter clawbacks of Old Age Security benefits. Many retired couples pay a lot of attention to this at the end of every calendar year. The goal is for each member of a retired couple to maximize retirement income from all sources (pensions, investments etc.) but to stay slightly below the point where Ottawa starts clawing back OAS benefits. After all, OAS payments are for many a welcome $690/month before tax or $8,300 a year, and inflation-indexed to boot. In 2020, the threshold at which OAS benefits began to get clawed back was $79,054 according to Hector, but has risen every year: and is expected to reach $90,997 in 2024.

If near 70, start CPP a year or two early

Fortunately, Canada Pension Plan (CPP) benefits are NOT clawed back at any level. But here too, inflation indexing comes to the rescue for retirees and semi-retirees. In fact, for the second year in a row semi-retired actuary Fred Vettese is arguing that near-retirees hoping to maximize CPP payouts by waiting to age 70 might instead take it a year or two early to take advantage of inflation adjustments that kick in each January. He suggested that late in 2022 that those who were thinking of starting CPP in 2024 should start them now. As he said in an email to me: “I determined it definitely made sense to start it in late 2023 instead. Doing so is worth an extra few thousand dollars.”

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