The Canadian government gives money to people in need through the Guaranteed Income Supplement (GIS). It gives extra money every month to adults on a low income who are already getting Old Age Security (OAS) payments. The goal of GIS is to help these older people have a good living. The amount of money someone gets from GIS goes down as their income goes up.
Often, people think that GIS is only for retirees with very low incomes. In fact, almost one-third of retirees get this benefit. For instance, taking out $1,000 from an RRSP or RRIF could mean that GIS payments drop by $500 to $750 the next year.
This makes planning for retirement with GIS benefits hard, since strategies to lower GIS clawbacks aren’t always the same as strategies to lower income tax for seniors with higher incomes.
Why is it Difficult to Plan GIS?
It’s hard to plan for the Guaranteed Income Supplement (GIS), especially for people whose incomes are low to middling. It’s hard to understand because you have to think about both income tax rates and the rates at which government benefits like GIS are cut (clawbacks) as income rises.
It can be hard to plan for retirement with GIS. People who are qualified for GIS have to deal with both tax rates and benefit cuts, while high-income retirees only have to worry about income tax. Planning mistakes can greatly diminish the benefits of GIS.
Because of this, it is important to plan your GIS with specific, well-thought-out strategies and, in some cases, get help from a professional with your money.
Detailed Strategies To Increase GIS Amount
Start CPP Early at Age 60
Starting to get benefits from the Canada Pension Plan (CPP) as early as age 60 can make future GIS payments bigger. Delaying CPP can make its benefits bigger, but it will also make GIS clawbacks bigger. When GIS clawbacks are taken into account, it may be better to start CPP early and put the extra money into a Tax-Free Savings Account (TFSA).
Before-64 RRSP/RRIF Withdrawals to Lessen GIS Impact
Withdrawals from RRSPs and RRIFs are taxed as income and have a big effect on GIS payments after age 65. Even though you’ll pay more in taxes, it’s often better to take money out of these accounts before you turn 64, because the higher GIS clawbacks after that age are still worse. You can put the money in a TFSA, and it won’t change your GIS payments.
Also See:- Old Age Security, When and Why Should You Defer OAS Pension?
Strategic RRSP Contributions for Maximum GIS Between 65-72
This more advanced plan involves strategically contributing to an RRSP to lower taxed income, possibly to zero, and maximize GIS benefits between the ages of 65 and 72. To do this, you need a lot of RRSP contribution room and money to make these payments. Starting CPP at age 60 can also help this plan because it lowers the amount that needs to be put into an RRSP.
RRIF Drawdown After-71 for Reduced GIS Clawbacks
When you turn your RRSP into an RRIF at age 71, you have to start making minimum payments at age 72, which will result in GIS clawbacks. It might be better to quickly take money out of the RRIF every one to three years to lower total GIS reductions, even though you will lose GIS and pay more income tax during those years.
GIS Calculation Based on Current Year’s Income in Initial Retirement Year
Usually, GIS payments are based on income from the previous year. This can be a problem in the first year of retirement when income from work is higher. It is possible to ask that the GIS funds in the first year of retirement be based on the expected income for the current year. This request is very important to change taxed income because of big changes from last year.