Olev Edur answers your questions about your rights, personal finance, and estate planning
I’m a 62-year-old widow on a limited income. For the past three years, I’ve been paying $100 a month to the bank for an RRSP. It hasn’t been easy to keep up with the payments, but I’m trying to prepare for the future. However, I’ve realized that when I apply for Old Age Security (OAS), I’ll be eligible for Guaranteed Income Supplement (GIS), too. Why am I knocking myself out with RRSP payments, when they’ll end up reducing my GIS entitlement?
It’s truly shameful that some banks are still flogging RRSPs to low-income seniors when they know very well that these people will be entitled to GIS upon retirement at age 65.
They neglect to tell people that once they start collecting those benefits, every dollar they withdraw from that RRSP will reduce their GIS by 50 cents. That’s almost the equivalent of the tax rate on Canada’s highest-income earners.
I suggest that you immediately stop making contributions to your RRSP. If the bank gives you a hard time, you might tell them you’re going to complain to the Office of the Superintendent of Financial Institutions and send an email to every major news outlet in the country describing how the bank is bolstering its profits by foisting inappropriate financial choices on low-income senior citizens.
Next, I suggest that you withdraw all the funds from this RRSP before you turn 65 and start collecting OAS and GIS. Given you’ve been contributing for only the past three years and don’t currently earn a lot of money, the amount involved should be low enough that it won’t increase your tax bill by much, if at all—certainly less than the 50 per cent hit that will otherwise apply to your GIS benefits. If the RRSP contains fixed-term investments such as multi-year GICs, you can even withdraw them “in kind” without having to sell them and incur a stiff penalty.
Once you’ve moved the money out of the RRSP, I suggest that you put the after-tax remainder into a tax-free savings account (TFSA).
You won’t get a tax deduction for this contribution, but any growth within the plan will be tax-free. More important, any withdrawals from a TFSA aren’t considered income, so they’ll never affect GIS or any other income-geared benefits.
