David Field, a certified financial planner (CFP) who runs Papyrus Planning.Supplied
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This is the latest article in our series, Planning for the CPP, in which Globe Advisor explores the decisions behind when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.
As part of the series, we invited readers to ask questions about their Canada Pension Plan (CPP) retirement benefits and found experts to answer them. This week, David Field, a certified financial planner (CFP) who runs Papyrus Planning in Mississauga, reviews one reader’s situation with CPP, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) benefits.
I have read articles about when to take CPP for years, and I have never seen my circumstances mentioned. I had savings and a registered retirement savings plan (RRSP), so I was on the fence about delaying my CPP. I ended up taking my OAS benefits at 65 and delayed my CPP until January 2023, a month after I turned 66. Being born in December meant my income in 2022, when I was 65, was minimal, with no RRSP withdrawals and minimal stock sales, so I had low capital gains. I started getting GIS in May 2023 automatically following the completion of my 2022 tax return. To my surprise, I was also eligible for other low-income benefits. Had I known, I may have delayed my CPP benefits for another year.
It’s always a pleasant surprise to qualify for additional income. Although the OAS is taxable income, it’s not used in the income calculation for the GIS. As the GIS is a benefit under the OAS program, when you started your OAS, your income from 2022 must have fallen below $21,456 ($28,320 for a household) to receive the GIS in 2023.
When trying to maximize your GIS income, there are usually two strategies: start your CPP at 60 and withdraw from any RRSPs or Life Income Fund (LIF) before 65, or delay your CPP until 70 and any RRSP or LIF withdrawals until 70 or 71.
The first strategy is usually for people who have earned a lower income most of their lives or haven’t been able to save much for retirement. That will allow them to maximize their GIS and OAS income. Usually, any savings in an RRSP will be minimal. Any money withdrawn could then be saved in a tax-free savings account (TFSA), as withdrawals from TFSAs will not reduce GIS income.
The second strategy is best for those with low expenses or sizable non-registered savings. It allows qualification for the GIS for a few years, but once the CPP starts, and then registered retirement income fund (RRIF) or LIF withdrawals are required at 72, the GIS usually goes away. It sounds like you’re following this strategy.
Whether this second strategy is best for you depends on how much you have saved in RRSPs or locked-in retirement accounts (LIRAs), the size of your CPP retirement benefit, your goals (how you want to spend your money), and the province or territory you live in.
For those with large savings in their RRSP or LIRAs, it may be more advantageous to withdraw from those savings – even if the income is not needed – as it provides more time to withdraw fully taxable income at lower tax rates. That’s especially true if you have a pension or RRIF income to split with a spouse. Also, spending money when you’re younger is usually more enjoyable than when you are older. If you don’t need the money, saving it in a TFSA works well to ensure tax-free growth.
Melting down RRSPs or LIRAs often works better in provinces and territories with many marginal tax rates. For provinces with just a few marginal tax rates, this strategy may not make tax sense, as it might be better to let your investments grow longer in the shelter of the RRSP or LIRA. However, it may make sense when compared to your retirement goals.
If you already maximize your TFSA contribution room without additional RRSP or LIRA withdrawals, withdrawing early may also not make sense as you will lose out on tax-sheltered growth.
When qualifying for the GIS, it’s important to remember that there’s a delay because the Canada Revenue Agency requires you to file your taxes to identify your income. Service Canada will then use this information in July to adjust your GIS and OAS payments. So, when you file your taxes in 2024 for your 2023 taxes, you may see an adjustment up or down in your GIS payments in July of this year.
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