Q.

Does it make sense to cash in registered retirement savings plans (

RRSPs

) to maximize Old Age Security (

OAS

) and Guaranteed Income Supplement (

GIS

) payments? A serious cancer illness in 2014 caused us to lose our way financially. My husband Ron and I are both 62 years of age now and Ron has $125,000 in an RRSP but no tax-free savings account (

TFSA

). Ron expects about $8,000 annually from Canada Pension Plan (

CPP

) and I expect about $6,400 annually and we

expect to retire

at age 65 in 2028. We have no other retirement income. Should we cash in RRSPs by December 2028 (Ron’s and my retirement date) and pay the taxes now so we qualify for GIS at retirement? Any RRSP money after tax paid on the withdrawal would go into TFSAs. Ronald’s annual employment income for 2022, 2023 and 2024 will be about $50,000. I have a small income of $8,000 annually through part-time work. We are more than able to live on our CPP, OAS and the GIS (amount based on our CPP income of $14,400), withdrawing about $5,000 annually from the TFSA money we build up from the RRSP transfers. We will sell our home when Ron turns 71 with expected equity of $250,000. We expect a small inheritance of $80,000 by 2030.

—Elise and Ron in Moncton

FP Answers:

Elise and Ron, I love your thinking on this.

My only caution is that you don’t fixate on one strategy and miss better strategies. I like to step back, look at the big picture, and run different solutions to test different ideas. This allows us to see, and understand, why one strategy is superior to another. I am not suggesting your thoughts are not the way to go, just that you want to be sure, or as sure as you can be, especially when you are about to put the RRSP sell order in knowing you will have to pay a lot of tax.

To get a sense of how all the pieces may come together I modelled four different solutions:

  1. Do nothing now and at age 65 draw on your RRSPs as needed.
  2. Draw down on your RRSP so it is gone by the year you turn 65 and add the proceeds to your TFSAs so you can maximize the GIS. This is your thought.
  3. Don’t touch your RRSP until age 65 and then convert it to a RRIF and withdraw it all, splitting the effective “pension income” between the two of you to lower taxes.
  4. Delay your CPP to age 70 to get the higher CPP. Between age 65 and 70 replace your CPP with RRIF withdrawals which will lead to lower RRIF minimum withdrawals after age 70.

In all cases I assumed you will add what you can of your inheritance and the proceeds of the home sale to your TFSA.

The accompanying table lays out the results.

As you can see from the table your intuition is correct if you are using your final net worth at age 91 as your measure. It is better to deplete your RRSP by the year you turn 64. This approach gives you the lowest taxable income and the highest GIS. The amount of GIS a lower income person or couple will receive is based on net income minus OAS. Also, money drawn from a TFSA is not considered income, which I am sure is why you suggested drawing from your RRSP and building your TFSA.

It is interesting to note that the solution with the highest net worth is also the solution paying the highest amount of tax. It is not shown in the table but for solutions No. 2 to No. 4 all the tax was paid in the first three years while Ron was working. In solution No. 4 when CPP is delayed to age 70 the only tax paid is on Ron’s income. There is no tax owing on future RRIF withdrawals because of your low income.

Now look at the breakaway age. This is when your net worth in solutions No. 2 to No. 4 becomes larger than your net worth in solution No. 1. You will notice that by delaying CPP there is no net worth advantage until age 90. This is partially because the larger CPP income reduces the amount of GIS received. In many cases lower income households may be better off starting CPP at 65 or earlier.

Finally, you are ending up with a large net worth at age 91 which means you could and likely will be spending more. I have done a preliminary overview, but I would recommend you take a little more time to think about your cash flow and spending. For example, what will you do for housing once you sell your home? Changes in cash flow may point to a different solution.

  • Will an overpayment of capital gains on an estate be returned to beneficiaries?
  • How does John decide whether to sell or lease his grain farm before he retires next spring?

I hope you remain cancer free and enjoy a healthy retirement.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.