Q. I am 66 years old and have not had a good financial plan, but hope to work for another 5-10 years. I own my condo and will have it paid off in full in 5 to 6 years. I also have no savings to speak of—except for $12,000.
I am renewing my mortgage at a great variable rate of 2.8 %. It has been suggested to me to add $25,000 onto my mortgage and to put that $25,000 into an RRSP. This would save me $7,000 in taxes this year, and cost me $2,100 in interest to borrow … so I’m ahead $5,000. But at age 71 I will probably still be in a 28% to 30% tax bracket, so an RRSP may not be the best idea as I will have to pay taxes when I take it out at that time and it may push me into an even higher tax bracket or cause a clawback in my OAS. So is this a good move for me?
My second question is, would a TFSA be a good alternative? Should I borrow to invest in a TFSA? I think the TFSA is better as I may qualify for the Guaranteed Income Supplement (GIS) and the TFSA apparently won’t affect any qualification to apply for this subsidy. Your advice is much appreciated,
A. Dawn, from the details you’ve given I can’t see a situation where if you do one thing you may lose some of your OAS to clawback, and if you do a different thing you may lose some of your GIS to clawback.
I’ll run the numbers for you. I’m going to assume that you have an income between $55,000 to $80,000/yr. and no pension, which will allow me to formulate an answer to your question.
Focus your retirement planning on, “how to maximize government tax credits and benefits”. This means planning for the lowest possible taxable retirement income you can achieve. The exception to this is your CPP and OAS.
To do this accumulate funds in your TFSA, pay off the mortgage on your condo, and then save money in a non-registered account.
Don’t contribute to an RRSP. You won’t be able to accumulate enough in RRSPs to overcome your need for the GIS.
You’re still working so if you have not started your CPP and OAS pensions, wait until age 70 unless you stop working sooner. The CPP increases by 8.4%/yr. every year you delay past age 65 and the OAS by 7.2%/yr.
I know, a higher CPP means a higher taxable income which is what I recommended against, however, in your case Dawn, with very little in savings the CPP will provide you a guaranteed indexed pension for life.
The OAS pension, although taxable, is not included as income when determining your eligibility for the guaranteed income supplement (GIS). Also, if you are working you may find that your salary or bonuses push you into the OAS clawback zone ($75,910 to $122,843). If that’s the case you’re going to lose some of the OAS anyway, so delay.
Should you borrow to make a TFSA contribution? I wouldn’t. Sure, on paper it could work but it is not worth the risk this close to your retirement. Remember, leveraging doesn’t just magnify gains, it also magnifies losses.
Instead, focus on getting your mortgage paid off and contributing to a TFSA. Financially, there is no difference between paying down debt or accumulating money in a TFSA if the interest rate associated with both is the same.
If you think you can earn more in your TFSA than the interest rate on your mortgage then lean towards TFSA contributions. Personally, without much planning experience, I’d suggest taking the sure thing and pay down your mortgage first.
Allan Norman is a Certified Financial Planner and Chartered Investment Manager with Atlantis Financial Inc., in Barrie, Ont.
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning services through Atlantis Financial Inc. and can be reached at email@example.com
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