How RRSP Contributions Affect Your Government Benefits

How RRSP Contributions Affect Your Government Benefits

RRSP contributions can be a great tool to help manage your income taxes before and after retirement. They can also be a great tool to help manage your government benefits in a similar way. RRSP contributions affect government benefits like the Canada Child Benefit (CCB), Ontario Child Benefit (OCB), Guaranteed Income Supplement (GIS), GST/HST Credit, Ontario Sales Tax Credit etc etc.

What many people may not realize is that most government benefits have a “claw back” rate that acts like a tax rate. If you earn more income the “clawback” rate will reduce your government benefits. But the opposite also happens, if you make an RRSP contribution and your income goes down, then this “clawback” rate will work in reverse and it will increase your government benefits!

There are a couple situations where RRSP contributions can have a BIG effect on government benefits. Let’s take a look at two real life examples.

One example is a senior who is receiving GIS benefits. We’re going to plan some strategic RRSP contributions to help them maximize their GIS benefits. This is counter-intuitive, we’re always told that TFSAs are best for low-income individuals, but in this case we can use RRSP contributions strategically to maximize GIS.

The second example is a young family with three children. They’re receiving the Canada Child Benefit and the Ontario Child Benefit and we’re going to plan some strategic RRSP contributions to help them maximize their family benefits.

When To Convert RRSP To RRIF?

When To Convert RRSP To RRIF?

When to convert RRSP to RRIF? What is the right time to convert? What are the advantages of converting?

Converting an RRSP to a RRIF is mandatory by the end of the year you turn age 71. This triggers mandatory minimum withdrawals the following year and each year after that. The minimum withdrawal is based on the ending balance the previous year and the account holder’s age.

There is a common misconception that you should wait until the last possible moment to convert an RRSP to a RRIF. Maybe this is because it’s a “forced” conversion? Something that’s forced couldn’t be good right? Perhaps it’s because RRSPs grow tax free? Why not delay withdrawals as long as possible, why voluntarily make withdrawals by converting to a RRIF early?

Despite the misconceptions above, in many cases, converting an RRSP to a RRIF should be done much earlier than age 71.

There are many reasons for a retiree to convert an RRSP to a RRIF well before the mandatory age of 71. In this post we’ll highlight some of the considerations when deciding when to convert RRSP to RRIF.

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 claw back rates associated with them. As your income increases, your benefit will go down based on this claw back 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 claw backs on GIS and OAS. With claw backs 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 understanding government benefits can potentially provide a big boost to your long-term financial security. Ignoring government benefits can make things unnecessarily difficult.

Understanding TFSAs: The 8 Benefits (And 3 Drawbacks) of TFSAs

Understanding TFSAs: The 8 Benefits (And 3 Drawbacks) of TFSAs

Tax-Free Savings Accounts (TFSAs) are relatively new. They were introduced just over 10 years ago in 2009. Even though they’ve only been around for a relatively short time they’re already the most used out of the major tax-sheltered accounts. There are over 5.5 million households in Canada that have an active TFSA account.

(Authors Note: I love it when people use their tax-sheltered accounts. Good tax planning is a key component of any financial plan and can add $100,000’s to your net worth)

The average usage rate for the TFSA is pretty impressive at 40.4%. This is relatively consistent across both age and income. The highest usage rate is in Ontario where over 45% of the households are using a TFSA. The median contribution to a TFSA in 2016 was $5,765.

All-in-all these are impressive numbers for a relatively new tax-sheltered account.

Given the high usage rate the TFSA must be pretty great, right?!?!

In this post we’ll cover exactly how a TFSAs works, the benefits of a TFSA, as well as some of the drawbacks of a TFSA.

Understanding RRSPs: The 6 Benefits (And 7 Drawbacks) of RRSPs

Understanding RRSPs: The 6 Benefits (And 7 Drawbacks) of RRSPs

RRSPs are one of the three major tax shelters available to Canadians. They were created in 1957 and since then RRSPs have been a key way to delay and avoid taxes. There are many benefits to an RRSP but also a few drawbacks.

In general Canadians aren’t taking full advantage of this tax shelter. As of 2015 there was over $1 trillion of unused contribution room. That’s an average of $41,560 per tax payer!

Each year the unused contribution room continues to grow. Over the last 5 years unused contribution room has grown by $1,900 per person per year.

This begs the question….

Why aren’t we using the RRSP to its full advantage?

Out of all tax payers only 1 in 4 used an RRSP last year. While this might seem low it’s important to note that RRSPs aren’t for everyone. There are drawbacks to using an RRSP and it’s because of these drawbacks that some people choose a different tax shelter instead, like a TFSA.

Still, there is a huge potential for tax savings out there. Even at the lowest federal tax rate the potential tax rebate is about $150 million or roughly $6,000 per person. Who wouldn’t like to get a $6,000 tax refund?!?

In this post we’ll cover how RRSPs work. We’ll also cover both the benefits and drawbacks of an RRSP.

The New TFSA Contribution Limit! How Big Could Your TFSA Get If You Contribute The Max Each Year?

The New TFSA Contribution Limit! How Big Could Your TFSA Get If You Contribute The Max Each Year?

The TFSA is an amazing account and it just got a little bit better. The contribution limit for 2021 is an additional $6,000. This means that as of January 1st 2021, anyone over the age of 18 in 2009 will have $75,500 of TFSA contribution room if they’ve never contributed before!

What makes the TFSA so amazing is the tax free compounding and when this compounding starts to take hold the results are incredible (just take a look at some of the projections below).

It’s reasonable to expect that many of us with TFSAs will see them reach $1,000,000+ at some point in the future. It’s just a matter of time. We’ll share some projections below but its pretty reasonable to expect that TFSAs could reach $5M, $7M or even $10M+ (in future dollars).

In fact, having TFSAs that reach $1,000,000+ is pretty common in many retirement projections that we do at PlanEasy.

Often, from an income tax and estate planning perspective, we want to draw down TFSAs last in retirement (or sometimes they’re also draw down strategically to avoid higher marginal tax brackets). We’re also strategically shifting assets from RRSPs/RRIFs into TFSAs over time. This leads to some very large TFSA balances and very little tax on the estate (depending on future investment returns of course).

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