I spent some time recently helping a low-income retired couple, the Wilsons, figure out what to do with their RRSPs now that they are on the verge of having to convert them into RRIFs. They know that because they collect the Guaranteed Income Supplement (GIS), the minimum RRIF withdrawals will reduce their GIS benefits. The question is whether there is anything they can do about this. To protect their privacy, I’m not using the Wilsons’ real names and I won’t reveal their exact incomes or amount of savings. The fact that they collect GIS puts their income into a range, and I’ll reveal that their savings are shy of 6 figures. I took a detailed look at how RRIF income affects the Wilsons’ finances, and one observation is that this is a complex undertaking. Low-income retirees don’t pay income tax, but they do receive a number of different types of benefits that are income-tested. This means that each dollar of RRIF income can reduce their benefits. Not only is the GIS clawed b...

Conventional wisdom is that the Guaranteed Income Supplement (GIS) is clawed back 50 cents for each additional dollar of income. However, with the GIS top-up introduced in 2011, the total clawback rose to 75% within a range of income. This makes it even more important to take into account the GIS clawback when helping low-income seniors plan their finances. Service Canada provides a set of tables to help seniors determine their GIS and Allowance payment amounts . These tables apply only to seniors who are receiving the maximum Old Age Security (OAS) amount. Starting with your yearly income excluding OAS, GIS, and Allowance, you can look up your monthly GIS or Allowance. However, the tables won’t give you a simple picture of how GIS works. The Service Canada tables make it easy for seniors to look up the GIS payments, but they’re cumbersome for planning out different scenarios. Rather than focusing on yearly income, I prefer to think about monthly income. And for couples, in...

According to Newton, for every action there is an equal and opposite reaction. If the proposed Tax-Free Savings Account (TFSA) becomes law in Canada, we should expect reactions to the changes it will cause. The main factor that determines whether TFSAs or RRSPs are better is tax rates . If your tax rate will be higher when you withdraw money than it was when you contributed money, then you should prefer a TFSA. Ironically, it is often the poorest seniors who fall into this category because of clawbacks. As a senior’s income rises, the Guaranteed Incomes Supplement (GIS), the age credit, and Old Age Security (OAS) all get clawed back, which can make the effective tax rate very high. For example, a senior with an income of $12,000 who withdraws an extra $1000 from an RRSP or RRIF will pay an extra $780 in income taxes, mainly because of the GIS clawback. This is a tax rate of 78%. Effective tax rates can be even higher due to other government programs with income tests. Having a hi...