Are you a Canadian over the age of 60 who is currently considering taking CPP benefits? If so, you need to do some research. Although CPP benefits are a valuable lifeline for many Canadian retirees, some red flags can tell you it’s not quite time to take them. In this article, I will explore four CPP red flags that every Canadian over 60 needs to know.
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Early withdrawal
Early withdrawal is one of the biggest CPP red flags out there. If you take CPP before the age of 65, your CPP is reduced by 0.6% for each month of early retirement. If you withdraw benefits at age 60, your benefit is reduced by a full 36% compared to someone withdrawing at age 65!
CPP taxation
Next up, we have CPP taxation. The more you earn, the more taxes you pay. If you still work and decide to draw CPP, the CPP money could be taxed at a higher rate. This is just another reason to wait until you are truly Retired with a capital ‘R’ before drawing CPP.
The old age security (OAS) clawback
Next up, we have the OAS clawback. This happens when your income is too high. Every dollar of income past the clawback threshold is reduced by 15%. The threshold is around $90,000, so you won’t get there with CPP alone, but CPP plus employment income could get you clawed back. Another reason to “capital R retire” before drawing CPP.
The guaranteed income supplement (GIS)
The GIS is another retirement income supplement like OAS. This one is exclusively for low income seniors. If you are single, divorced or widowed, you can’t earn $22,272 or more and still get full GIS. GIS is clawed back by 50% for each dollar above the threshold. CPP contributes to earnings, so too much of it could cut off your GIS.
What’s the solution
As you can see, Canadians over 60 who are considering taking CPP benefits face many risk factors. Fortunately, there is a simple solution that covers pretty much all of them:
Keep your income as low as possible.
By that I mean, claim tax deductions that you are eligible for, to lower your taxable income without lowering the actual cash coming in. If you’re like most Canadians, you probably have plenty of charitable contributions, medical expenses, and caregiving costs you could deduct but don’t. Speak with an accountant to find which of these you are eligible for.
In the meantime, there’s one tax deduction every Canadian is eligible to claim:
The RRSP contribution tax deduction.
When you contribute money to your RRSP, you get a tax break equal to your tax rate times the amount you contribute. So if you contribute $1,000 in a year and have a 33% marginal tax rate, you save $333.
A great thing about RRSPs is that they let you grow and compound your investments tax-free.
Let’s say you purchased a $50,000 position in the BMO Canadian Dividend ETF (TSX: ZDV). As a dividend ETF, ZDV has a comparatively high yield, so a considerable percentage of the return comes from dividends, which are always taxable when held in non-registered accounts.
When you hold an ETF like ZDV in an RRSP, you pay no taxes on the dividends. Also, should you sell your ZDV shares while they are held in your RRSP, the sale is not taxed either. This tax-sheltering feature of the RRSP lets you compound your returns more than you could in a taxable account. This makes RRSP investing a worthy use of your money – one that could lower your CPP taxes as well.
