Q. Does it make sense to cash in RRSPs to maximize Old Age Security (OAS) and Guaranteed Income Supplement (GIS)? A serious cancer illness in 2008 took our finances “off the rails.” We had to start over. I’m 63 (Bob) and my wife Laura is 61 and we’re from New Brunswick. I have $135,000 in RRSPs while my wife has none. We also have no TFSAs. My CPP is $8,400 a year gross and Laura’s is $5,400. We have no other retirement income.
Should we cash in RRSPs by December 2020 (our retirement date) to minimize income to qualify for GIS? The money would go into a TFSA. Qualifying for GIS would have the added bonus of making us eligible for New Brunswick’s senior drug program.
My annual employment income for 2018, 2019 and 2020 will be $44,000. I can also claim the disability tax credit for 2018. We are more than able to live on our CPP, OAS and the GIS (amount based on our CPP income of $14,000), withdrawing approximately $5,000 annually from a TFSA. We will sell our home (just built) when I turn age 71 with expected equity of $80,000. We also expect a small inheritance of $35,000 by 2020. ANY help would be greatly appreciated.
—Bob and Laura
A. Bob and Laura, I’m sorry to hear of your illness and the resulting impact on your finances. It’s good that you are able to start over and consider various options.
I would not advise withdrawing all of your RRSP money in the next 2 years while Bob is still working. All RRSP income is fully taxed and it would likely push him into a higher tax bracket.
Guaranteed Income Supplement (GIS) is available only to OAS recipients who ‘income qualify’. The current maximum amount of the OAS benefit is $600.85 per month. If you have lived in Canada for 40 years after your 18th birthday, you would likely qualify for maximum OAS benefit at age 65. If your spouse receives the maximum OAS benefit, then the other spouse could receive $540.23 monthly of GIS, but only if your combined income was less than $24,048 per year. (If you don’t believe that you will receive full OAS, then you should contact Service Canada for more details).
Based on just your combined CPP income, you would each qualify for $814.69 in combined OAS/GIS, which works out to $9,776.28 per year—bringing your family income to $33,352.56 annually. Because the GIS calculation is based on total family income, the more you make the less benefit you receive. As well, keep in mind that $24,048 in income per couple (excluding OAS and GIS income) is the cut off point for no GIS benefit.
Based on your CPP income, you should still be able to withdraw up to $10,000 annually from your RRSPs and still receive some GIS which also qualifies you for the New Brunswick Seniors’ Drug program. If you delay your RRIF mandatory minimum withdrawals to age 71, the minimum RRIF withdrawal would still be less than $10,000 and will not cause you to lose the benefit. You could receive the maximum GIS until age 71 and then depending on the RRIF income, you may receive less than the maximum GIS benefit but you would still qualify for the NB drug plan. And you could also then withdraw from your TFSAs for additional income as needed. Both the sale proceeds from the home and the inheritance are non-taxable and will not affect the GIS income.
When you start withdrawing from your RRSP or RRIF, ensure that you have 3 to 5 years of savings equal to the annual withdrawal amount in a safe and secure investment like fixed income or cash so it will withstand any short-term stock market ups and downs. The remaining balance could remain in a balanced investment so it can continue to grow until you need to withdraw it as income. This is often referred to as the ‘Retirement Bucket’ strategy. Hope that helps, and enjoy your retirement.
Janet Gray is a Certified Financial Planner with Money Coaches Canada in Ottawa
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