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Reader Mail: I’m a Low Income Senior – RRSP or TFSA?

A reader emailed me recently about being a low-income senior, but with some savings ability and was wondering if it makes sense to start an RRSP or a TFSA.

The email did not include a lot of details, but for the most part, my answer would be the same – TFSA.

The next question is why?  The reason lies in seniors benefits and the clawbacks that result when certain income thresholds are met.  For low-income seniors, they would likely qualify for additional benefits, and any extra income (like from RRSP withdrawals) could result in clawbacks of those benefits.  Whereas income generated from a TFSA does not count as income and, most importantly, does not test government benefits.

For low-income seniors, a large portion of their income would come from Old Age Security (OAS), some from Guaranteed Income Supplement (GIS), and maybe some from Canada Pension Plan (CPP).

Let’s dig a bit into these programs.

How Old Age Security Works (OAS)

Old Age Security is a (Canadian) government program that pays a monthly benefit (adjusted to inflation) to seniors ages 65 and over.  OAS is paid out of the current Government tax base (unlike CPP) and is counted as taxable income.

To qualify for this program has nothing to do with if you’ve worked in Canada but how long you’ve lived here.  According to the OAS website, here are the qualifications:

  • be 65 or older;
  • be a Canadian citizen or a legal resident of Canada on the day before your application is approved;
  • have been a Canadian citizen or a legal resident of Canada on the day before you left Canada, if you no longer live in Canada;
  • have lived in Canada for at least 10 years since your 18th birthday to receive OAS in Canada; and
  • have lived in Canada for at least 20 years since your 18th birthday to receive OAS outside of Canada.

For 2019, the maximum OAS benefit is $7,289.52/year.  To receive this, you would need to have lived in Canada for 40 years after the age of 18.  Anything less than 40 years results in reduced benefits.  As mentioned above, these benefits are adjusted to inflation which means that they increase over time.  To put this in perspective, the maximum OAS benefit was $6,481.44/year in 2011.

Clawbacks

For low-income seniors, the OAS clawback is not a large concern.  If you’re 65 or older in 2019, the government will clawback 15% of income over $77,580.  Old age security will be completely eliminated for incomes over $125,937.

Here is an example:

  • The threshold for 2018 was $75,910.
  • If your income in 2018 was $86,000, then your repayment would be 15% of the difference between $86,000 and $75,910:
  • $86,000 – $75,910 = $10,090
  • $10,090 x 0.15 = $1,513.50
  • You would have to repay $1,513.50 for the July 2019 to June 2020 period.

Source: Canada OAS

What is GIS and the GIS Clawback

Guaranteed Income Supplement (GIS) is a “top-up” added to OAS for seniors with little or no other income besides OAS.  For 2019, the maximum GIS is $907.32/month/person, which when combined with maximum OAS ($607.46/month/person) works out to be $1,514.78/month/person. 

GIS quickly gets reduced by $1 every $2 earned (yes, even CPP) and eliminated at around $18k in net income (for single people); $24k for a married/common-law couple (both OAS pensioners); and, $43k if one spouse is not receiving OAS.

The following would be eligible to receive GIS in April to June 2019:

  • single persons with total income less than $18,240.
  • married/common-law couple, both OAS pensioners, with combined total income less than $24,096
  • OAS pensioners whose spouse/common-law partner is not receiving OAS, with combined annual income less than $43,728

Source: taxtips.ca

Here is a nifty online calculator to determine GIS amounts. 

A Primer on Canada Pension Plan (CPP)

If you have worked in Canada after age 18, and paid into CPP, you can expect some sort of CPP benefit as early as age 60 and as late as age 70.  The more that you can delay CPP, the higher the payout.  In fact, if you can push collecting CPP until age 70, the payout would be 42% more than the payout at age 65.

The average CPP payout is currently $680/mo or $8.1k/year with a maximum payout of $1,154.58/month/person or $13.8k/year/person.  As you can see, if you are a single low-income retiree that manages to qualify for an average amount of CPP, a significant portion of GIS will be clawed back.

To figure out how much to expect for CPP, this is one of the more accurate CPP calculators that I’ve come across.

Putting it all Together

For a low-income senior, it is recommended to have savings in a TFSA rather than an RRSP. Why?  Because RRSP withdrawals count as income, which will impact GIS benefits for low-income seniors.  TFSA withdrawals, on the other hand, do not count as income and are not government benefit tested (for now).

Again, check out the calculators listed above to run some of your own numbers, and how your income will look during retirement.

If you are interested, I wrote a recent article about how I plan on withdrawing from my RRSP/TFSA during early retirement.

If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).

6 Comments

  1. beth on October 3, 2019 at 12:15 pm

    Future lower income senior here…. Good article. I have been drawn in by the great tax credits I get from maxing out my RRSP every year. That will probably mean a lower OAS for me. Moving forward I will lower that and focus more on my TFSA.

    I know that I need to put some money in my RRSP every year to avoid paying extra taxes and I will continue to do that. Would it be a good idea for me to save up my RRSP contribution room for a few years and make a big RRSP deposit in one year to get a large tax refund every three or four years?

    • FT on October 3, 2019 at 2:47 pm

      Hi Beth! Have you compared your tax bracket now with what you expect in retirement (including clawbacks)? One big advantage of an RRSP is if you are in a higher tax bracket now, and lower in the future during retirement. If you are in a lower tax bracket now, contributing to a TFSA first pay be a better long term plan. It’s challenging to get into the details without the numbers though.

    • FT on October 14, 2019 at 3:44 pm

      Beth, what is your tax bracket now and what do you expect in retirement? If you are in a lower tax bracket now, it may make sense to stop your RRSP contributions to focus on TFSA, even if that means losing that annual tax refund. The ideal solution is to work with a financial planner to determine the most efficient path forward. This type of calculator seems to be of demand around here…. perhaps I should purchase the software to run scenarios for readers!

      • beth on October 15, 2019 at 7:10 pm

        I gross about $60k now. Not sure what bracket I am in. In retirement I will be earning less than $25k. I am trying to put more money in to my TFSA so I can get my retirement income even lower. I think some years may even be under $20k. I own my own home and may have to sell to free up that capital when I am in my late 60s or early 70s.

        I say yes to the software. I would be happy to provide information for you to run my scenario as an educational case for other future lower income retirees.

  2. Sven on October 3, 2019 at 7:54 pm

    What strikes me is that this person says they are already a low-income senior, but nonetheless have savings ability. This likely means that they have unused RRSP contribution room from their working years.

    Based on their marginal tax bracket in retirement likely being low, your advice to use a TFSA is sound. However, since RRSP contributions reduce net income in the current year, the situation may be different if, by contributing to an RRSP, they could reduce their net income to become eligible for GIS payments. In that case, using an RRSP may make sense.

    For example, imagine a situation where this person is living with their kids and doesn’t really need the income to live on. Why not reduce net income as much as possible to maximize government benefits in that situation, at least until age 71? Then, once there are serious health-related expenses that can be deducted from income, withdraw from the RRSP.

    • FT on October 14, 2019 at 3:41 pm

      Some good points Sven. Ideally, the reader contacts a financial planner with access to forecasting software to determine the best route. Every situation is different!

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