Optimizing Your Government Benefits: Both Now and In Retirement

Optimizing Your Government Benefits: Both Now and In Retirement

One of the biggest financial planning opportunities for regular people is around government benefits. Unless you’re earning an extremely high income you will probably receive some form of government benefit over the course of your life.

As a student, you may receive GST/HST credits. When you have a family, you may receive the Canada Child Benefit. And when you’re a senior you may receive Old Age Security and the Guaranteed Income Supplement.

Understanding how government benefits work can help you optimize how much you receive both now and in the future. A few simple changes can increase your benefits by $1,000’s per year and help you save more, increase your financial security, and general increase your peace of mind.

Some families may be doing this already, but not realize it.

Other families may not be doing it at all, and losing $1,000’s.

Most benefits are based on your net income and most benefits have clawback rates associated with them. As your income increases, your benefit will go down based on this clawback rate. But not all income is created equal, and some types of saving will increase your benefits.

One of the best ways to optimize your benefits is by carefully planning RRSP contributions. RRSP contributions decrease your family net income and increase your benefits. This increase in benefits can provide a big incentive to save. Depending on the number of children, for some families the increase in benefits from an RRSP contribution is worth more than the tax refund! In total, some families can get back $0.60-$0.70 for each $1 they contribute to RRSPs.

On the other side, when you’re ready to withdrawal from your RRSPs, these withdrawals need to be carefully planned. RRSP withdrawals increase family net income and can potentially trigger clawbacks on GIS and OAS. With clawbacks on GIS reaching up to 75% it’s important to plan RRSP withdrawals carefully to avoid losing 50%-75% of every $1 you withdraw from RRSPs in retirement.

If you’re earning a normal/average income then understanding government benefits can potentially provide a big boost to your long-term financial security. Ignoring government benefits can make things unnecessarily difficult.

Should You Make A Large RRSP Withdrawal Before The End Of The Year?

Should You Make A Large RRSP Withdrawal Before The End Of The Year?

As we approach the end of the year, one strategic tax and gov. benefit opportunity to take advantage of is making a large RRSP withdrawal.

Making a large RRSP withdrawal before the end of the year can make sense in a few situations. If you find yourself in one of these situations, a strategic RRSP withdrawal can help reduce income tax and increase government benefits over the course of your plan.

Out of these three situations we’ll explore in this blog post, one situation happens before retirement and about 1 in 3 people will find themselves in this situation. The other two situations happen after retirement and can help avoid higher income tax rates later in retirement.

How Do Tax Brackets Work? What Is Your Tax Bracket?

How Do Tax Brackets Work? What Is Your Tax Bracket?

How do tax tax brackets work? How do you figure out your tax bracket? These are important questions, especially when you’re trying to make the most of your money.

Figuring out your tax bracket can be very helpful when making personal finance decisions. It can help you decide which type of account to use, for example the TFSA or the RRSP. It can also help you understand how much you’ll keep after receiving a raise. It can help you understand how much tax you’ll pay on any extra spending in retirement. It can also help you understand how large your tax refund will be after making an RRSP contribution.

Understanding how tax brackets work, and what tax bracket you’re in, will help you make smarter financial decisions.

But tax brackets can be confusing, they can feel like a real mess of numbers. And even when you understand how tax brackets work there is something called your Marginal Effective Tax Rate (or METR) that can add to the complexity. This is when we look at both income tax rates plus government benefit clawback rates.

Your METR is more complex and will change over time depending on number of children, partners, age etc. Looking at Marginal Effective Tax Rates can expand the number of tax brackets to 10-20+ and we’ve got a few examples below.

In this post we’re going to show you how tax brackets work with a few visual examples. We’ll break down a few different income levels into their different tax brackets.

We’ll also talk about tax deductions and tax credits and how they affect (or don’t affect) your tax bracket. Lastly, we’ll touch on marginal effective tax rates for a few different situations like one child, two children, and retirement.

How To Get Around The RRSP Age Limit

How To Get Around The RRSP Age Limit

Did you know that there is an RRSP age limit? After a certain age you can no longer contribute to your RRSP. This is the same age limit that requires you to convert your RRSP to a RRIF.

The rule is, by the end of the year you turn age 71, you must convert your RRSP to a RRIF and you can no longer make RRSP contributions.

It doesn’t matter if you turn age 71 in January or in December, by the end of that year no more personal RRSP contributions can be made and the RRSP must be converted to a RRIF.

Interestingly, although you can’t contribute to a personal RRSP you can continue to earn RRSP contribution room after age 71. If you earn employment income at age 71 or beyond, then you’ll also earn more RRSP contribution room at the typical rate of 18% of earned income.

Seems odd, doesn’t it? You can earn RRSP contribution room after age 71 but you can’t use it (unless you’re in a specific situation which we’ll talk about below).

Similarly, if you have lots of unused RRSP contribution room, this will also carry forward past age 71 too. You might have RRSP contribution room available to use, but you won’t be able to contribute to a personal RRSP.

If you can’t use this RRSP contribution room then why does the CRA track it at all?

Well, there are a few things that can be done to get around the age limit for RRSP contributions and, in the right situation, this could provide some large tax reductions and/or government benefit increases.

What Is GIS Allowance?

What Is GIS Allowance?

GIS Allowance is one of those unique government benefits. It applies only in very specific situations, but when it does apply, it can be very large.

GIS stands for the Guaranteed Income Supplement and it’s a government benefit for low- and moderate-income retirees. It is available after the age of 65 if OAS benefits have begun and if taxable income (line 23600 on your tax return) is below a certain threshold.

Allowance is another government benefit tied to GIS. Allowance is only available in very specific situations but it’s worth over $1,200 per month or $14,000 per year!

Given the size of GIS Allowance it can be very beneficial to understand how it works and when it applies. But, because it’s so rare, its often not considered when creating a retirement drawdown strategy. Unfortunately, not adjusting a financial plan for GIS Allowance will make retirement unnecessarily difficult for lower-income couples.

GIS Allowance is a government benefit that applies in only a few situations, but it is a benefit that is extremely large, and therefore it’s important to understand if and when you may qualify.

The Tale Of Two Pandemics

The Tale Of Two Pandemics

The global pandemic has impacted all of us differently, our personal finances have gone through many changes and some have “weathered the storm” better than others.

FP Canada, the board that governs the Certified Financial Planner (CFP) designation in Canada, recently came out with a survey called “The Tale Of Two Pandemics” and it highlights both the positive and the negative impact that the pandemic has had on our personal finances (more details on the survey results at the end of this post).

There are some troubling stats within the survey, for example 14% of those in Ontario have been forced out of the labor market, 21% have seen an increase in expenses, and 14% have seen a reduction in work hours/income.

But the survey also highlights the opposite side of the pandemic, many people have not experienced a job loss, or a reduction in income, or an increase in expenses over the course of the pandemic.

In fact, looking at the statistics, it looks like there is a large group of people that have not been affected by the pandemic at all, and another group of people who have actually benefited financially from the pandemic.

This is consistent with the conversations we’re having with clients.

For those who have been fortunate enough to remain gainfully employed, for those who own a home or recently purchased a home, for those with a mortgage or other debt like student loans or HELOCs, and for those who are investing on a regular basis, the pandemic has actually improved their personal finances in a number of ways.

The pandemic has impacted us all differently, but for many people there have been one, two, three or more positive changes that may have actually improved their personal finances. As it turns out, this is especially true for those who had a financial plan already in place.

Here are some ways that a person’s personal finances may have improved during the pandemic…

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