Investing

TFSA or RRSP for seniors close to retirement?

  • Last Updated:
  • May 28th, 2019 2:28 pm
[OP]
Jr. Member
Jun 20, 2012
144 posts
15 upvotes
Toronto, Ontario

TFSA or RRSP for seniors close to retirement?

Hi Everyone, my parents need advice on which account to invest into since they just paid off their mortgage. They both have small work pensions that will net them around $6,000 each annually. Neither have invested in TFSA/RRSP so they have room for both.

Dad is still working at 68 and aiming to retire at 71. He makes around $50,000. His oas and cpp combined for $600/month. Mom is looking to retire later this year at 60 after an unexpected illness. She makes around $30,000.

With RRSP, we know that they would have more contribution room and it should benefit them since they expect a much lower tax bracket during retirement. However, RRSP will be converted to RRIF by age 71.

TFSA, on the other hand, they have plenty of carried over room, and the investments won't affect OAS and is tax-sheltered.

Any other factors they should consider when deciding whether to invest their money in TFSA or RRSP account? Thanks in advance!
22 replies
Newbie
Apr 2, 2019
48 posts
32 upvotes
Both are tax shelters, but have different benefits. If you are still working I would contribute to the RRSP. In Ontario you pay roughly $2000 in taxes on a $20000 salary, more than $11,000 on a $50000 salary. If you have not contributed to an RRSP you could potentially put all your income in a RRSP and pay no tax while still working for another 2 years. E.g if your salary was $50000 for the last 10 years, you could pay 18% of $500000 into a RRSP =. $90,000. That's assuming you have the funds to contribute and you can live on the money from your OAS and CPP.
Deal Addict
Mar 3, 2018
1849 posts
1838 upvotes
GTA
I would go with a TFSA if their combined income is going to be below $33K in retirement. That would qualify them for the Guaranteed Income Supplement (GIS). An RRSP withdrawal will reduce GIS if taken in retirement whereas a TFSA withdrawal will not.
Deal Fanatic
Apr 11, 2012
5667 posts
2893 upvotes
Winnipeg
DaveTheDude wrote: I would go with a TFSA if their combined income is going to be below $33K in retirement. That would qualify them for the Guaranteed Income Supplement (GIS). An RRSP withdrawal will reduce GIS if taken in retirement whereas a TFSA withdrawal will not.
I agree TFSA is better to keep the income low.
However the maximum combined income for GIS seems like 24k...
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Sr. Member
Jun 28, 2018
854 posts
590 upvotes
Toronto
From a planning perspective there is a RRSP mandatory conversion into a Registered Retirement Income Fund RRIF at age 71. The RRIF means your parents will need to make mandatory withdrawals of a certain percentage based on age. Compared to RRSP where they could continue accumulating within it, instead of withdrawing. RRIF conversion and the mandatory withdrawals would have a tax impact like those mentioned in other comments like GIS.

Perhaps depending on how much is saved in RRSP, the parents' age, and current income it may not make sense to add into the RRSP. As well as the type of investments as US dividends are sheltered unlike the TFSA.

TFSA is the most flexible choice, depending on how much room is available, as a tax shelter (not for witholding taxed distributions), as withdrawals will not have any tax impacts.
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Deal Addict
Mar 3, 2018
1849 posts
1838 upvotes
GTA
Wpegger wrote: I agree TFSA is better to keep the income low.
However the maximum combined income for GIS seems like 24k...
Yes 24K excluding OAS. The parents OAS would be added to the 24K limit.
[OP]
Jr. Member
Jun 20, 2012
144 posts
15 upvotes
Toronto, Ontario
Awesome, thanks for the feedback everyone. I honestly didn't know about GIS and its requirements; so it seems they are better off investing in TFSA because withdrawals are not taxable.
Member
May 2, 2019
429 posts
489 upvotes
Vancouver
btcoma wrote: I honestly didn't know about GIS and its requirements; so it seems they are better off investing in TFSA because withdrawals are not taxable.
RRSP still gives some advantage due to tax rate differential, but not much (under $400 if your dad earns exactly 50K and puts 6K into RRSP). The problem with RRSP/RIF is not a tax on withdrawals, but a chance to lose GIS in one or more years due to extra income. Even a single year of forfeited GIS costs more than RRSP can save at this point. So going TFSA only is a good choice to avoid potential costly mistakes.

You should research OAS/GIS rules which are tricky. My understanding, your mom won't be getting OAS/GIS until she's 65, but she can qualify for a GIS "Allowance" which is for ages 60-64 assuming her spouse is getting OAS and GIS. So after your father retires, he'll qualify for OAS and GIS and a your mom then can get the Allowance until she's 65. After she's 65, they both would get OAS but GIS is a close call as I understand their combined income can be quite close to the 24K threshold.
Deal Addict
Jul 23, 2007
4326 posts
2716 upvotes
Geez. Your dad is only a year younger than me, and they both want to start now? I was totally self taught without any financial education or university education for that matter, but started with an RRSP and a taxable account in my early 30's on a lower middle class income. No silver spoon here. What your parents don't seem to realize is the compounding they've lost out on all these years. That can never be replaced.
Deal Fanatic
Feb 4, 2015
6414 posts
2815 upvotes
Canada, Eh!!
Here's a nice table:

Old Age Security pension and Guaranteed Income Supplement amounts - April to June 2019
Your situation Maximum monthly payment amount Maximum annual income to receive the OAS pension Footnote 1
Old Age Security (OAS) pension
Regardless of your marital status $601.45 $125,696 (individual income)
Guaranteed Income Supplement (GIS) amounts for individuals receiving a full Old Age Security (OAS) pension.
If you are a single, widowed or divorced pensioner $898.32 $18,240 (individual income)
If your spouse/common-law partner receives the full OAS pension $540.77 $24,096 (combined income)
If your spouse/common-law partner does not receive an OAS pension $898.32 $43,728 (combined income)
If your spouse/common-law partner receives the Allowance $540.77 $43,728 (combined income)
.......
July 13, 2017 to October 25, 2018: BOC raised rates 5 times and MCAP raised its prime rate next day each time.

2020: BOC dropped rates 3 times and MCAP waited and waited to drop its prime rate to include all 3 drops.
Deal Addict
User avatar
Mar 10, 2018
3721 posts
790 upvotes
centre of universe
btcoma wrote: Hi Everyone, my parents need advice on which account to invest into since they just paid off their mortgage. They both have small work pensions that will net them around $6,000 each annually. Neither have invested in TFSA/RRSP so they have room for both.

Dad is still working at 68 and aiming to retire at 71. He makes around $50,000. His oas and cpp combined for $600/month. Mom is looking to retire later this year at 60 after an unexpected illness. She makes around $30,000.

With RRSP, we know that they would have more contribution room and it should benefit them since they expect a much lower tax bracket during retirement. However, RRSP will be converted to RRIF by age 71.

TFSA, on the other hand, they have plenty of carried over room, and the investments won't affect OAS and is tax-sheltered.

Any other factors they should consider when deciding whether to invest their money in TFSA or RRSP account? Thanks in advance!
TFSA.
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Deal Fanatic
Feb 4, 2015
6414 posts
2815 upvotes
Canada, Eh!!
Stryker wrote: Geez. Your dad is only a year younger than me, and they both want to start now? I was totally self taught without any financial education or university education for that matter, but started with an RRSP and a taxable account in my early 30's on a lower middle class income. No silver spoon here. What your parents don't seem to realize is the compounding they've lost out on all these years. That can never be replaced.
How does your post help them now? Agreed should have started earlier but did not so no time machine.

There are strategies at any age... adding to that discussion would help them.
.......
July 13, 2017 to October 25, 2018: BOC raised rates 5 times and MCAP raised its prime rate next day each time.

2020: BOC dropped rates 3 times and MCAP waited and waited to drop its prime rate to include all 3 drops.
Deal Addict
User avatar
Jul 29, 2013
1298 posts
936 upvotes
georvu wrote: How does your post help them now? Agreed should have started earlier but did not so no time machine.

There are strategies at any age... adding to that discussion would help them.
I agree Georvu, it does not help the parents but maybe help the son or someone reading this thread to see the benefit of RRSP started earlier.

It just so happens that Mom and Dad not contributing to an RRSP possibly leaves them eligible to receive GIS supplement from the government. The word here is POSSIBLY. Not a goal you want to set for retirement to have the government help but to do as must as you can as early as you can to make your retirement years comfortable with as many options as possible.

I do not think Stryker meant it as a put down or bragging. Just the reality of looking after your financial house to maximize your future.

Thanks to Btcoma for looking out for his parents.
Deal Addict
Jul 23, 2007
4326 posts
2716 upvotes
If the OP's parents watch their spending and can live within their means without any debt then they may just do OK in the long run. Jane Austen said basically the same thing in her books over two hundred years ago, and nothing much has changed since then.

I'm not a financial planner, nor do I pretend to be. As others have said mandatory withdrawal from a RRIF starts at the age of 71. Unless there's something I hadn't personally thought off, the TFSA seems to be the more logical choice. Good idea as well to keep an emergency fund either in the TFSA or outside.

The OP is Toronto. There is a great library system where even if a book is not in your local, you can always order it through their website. Plenty of financial planning books geared to Canadians where you can some sound financial advice (and sometimes not so sound).

My hope is whatever illness the OP's mother is going through, that she gets better soon.
Deal Addict
Jan 20, 2016
2028 posts
1009 upvotes
Houston, TX
I'd say TFSA you go. 99%.
A rule of thumb, RRSP _could_ be beneficial AFTER 60k income. Before that TFSA is much better. Especially with RRSP income will reduce OAS while TFSA don't.

Another big question what to put here...
As they need income, I'd suggest some dividends stocks....
Make the face great again
[OP]
Jr. Member
Jun 20, 2012
144 posts
15 upvotes
Toronto, Ontario
yvrbanker wrote:
RRSP still gives some advantage due to tax rate differential, but not much (under $400 if your dad earns exactly 50K and puts 6K into RRSP). The problem with RRSP/RIF is not a tax on withdrawals, but a chance to lose GIS in one or more years due to extra income. Even a single year of forfeited GIS costs more than RRSP can save at this point. So going TFSA only is a good choice to avoid potential costly mistakes.

You should research OAS/GIS rules which are tricky. My understanding, your mom won't be getting OAS/GIS until she's 65, but she can qualify for a GIS "Allowance" which is for ages 60-64 assuming her spouse is getting OAS and GIS. So after your father retires, he'll qualify for OAS and GIS and a your mom then can get the Allowance until she's 65. After she's 65, they both would get OAS but GIS is a close call as I understand their combined income can be quite close to the 24K threshold.
Thanks, it's close but they are in luck as their combined income is under the 24k threshold!
profile wrote:
I agree Georvu, it does not help the parents but maybe help the son or someone reading this thread to see the benefit of RRSP started earlier.

It just so happens that Mom and Dad not contributing to an RRSP possibly leaves them eligible to receive GIS supplement from the government. The word here is POSSIBLY. Not a goal you want to set for retirement to have the government help but to do as must as you can as early as you can to make your retirement years comfortable with as many options as possible.

I do not think Stryker meant it as a put down or bragging. Just the reality of looking after your financial house to maximize your future.

Thanks to Btcoma for looking out for his parents.
For sure, put saving for retirement in perspective for me. Even though it's a little late, I just want to help my parents.
Stryker wrote: If the OP's parents watch their spending and can live within their means without any debt then they may just do OK in the long run. Jane Austen said basically the same thing in her books over two hundred years ago, and nothing much has changed since then.

I'm not a financial planner, nor do I pretend to be. As others have said mandatory withdrawal from a RRIF starts at the age of 71. Unless there's something I hadn't personally thought off, the TFSA seems to be the more logical choice. Good idea as well to keep an emergency fund either in the TFSA or outside.

The OP is Toronto. There is a great library system where even if a book is not in your local, you can always order it through their website. Plenty of financial planning books geared to Canadians where you can some sound financial advice (and sometimes not so sound).

My hope is whatever illness the OP's mother is going through, that she gets better soon.
Thanks for the advice and your blessings! It's tough but on the bright side, it brought our family closer than ever.
asa1973 wrote: I'd say TFSA you go. 99%.
A rule of thumb, RRSP _could_ be beneficial AFTER 60k income. Before that TFSA is much better. Especially with RRSP income will reduce OAS while TFSA don't.

Another big question what to put here...
As they need income, I'd suggest some dividends stocks....
Yup, that's probably what I would suggest to them.
Sr. Member
Jan 15, 2015
621 posts
362 upvotes
btcoma wrote: Hi Everyone, my parents need advice on which account to invest into since they just paid off their mortgage. They both have small work pensions that will net them around $6,000 each annually. Neither have invested in TFSA/RRSP so they have room for both.

Dad is still working at 68 and aiming to retire at 71. He makes around $50,000. His oas and cpp combined for $600/month. Mom is looking to retire later this year at 60 after an unexpected illness. She makes around $30,000.

With RRSP, we know that they would have more contribution room and it should benefit them since they expect a much lower tax bracket during retirement. However, RRSP will be converted to RRIF by age 71.

TFSA, on the other hand, they have plenty of carried over room, and the investments won't affect OAS and is tax-sheltered.

Any other factors they should consider when deciding whether to invest their money in TFSA or RRSP account? Thanks in advance!
Investing a small portion of savings in an RRSP close to retirement is still a consideration, provided that you can take advantage of the $2000 tax credit.

Are You Taking Advantage of the Pension Income Tax Credit?...

TaxTips.ca - Pension Income Tax Credit...

To be eligible, the funds from an RRSP must first be transferred to an RRIF. Then every year after age 65, you can withdraw $2000 more or less tax-free, provided you have low or minimum income.

Since your father is working past 65, the RRIF withdrawal is followed by the $2000 income tax credit every year when filing tax returns, so he still benefits from tax savings.

When your father stops working at 71, his income includes the $6000 work pension plus any CPP/OAP. But an annual $2000 RRIF withdrawal would still yield the tax credit and should have little impact on total annual income.

In an ideal scenario, a person turning 65 would withdraw at least $2000 each year from the RRIF for 6 years (66 to 71) before the balance of an RRSP must be fully converted to a RRIF.

Thus a taxpayer should take full advantage of the tax credit as early as age 65 (or 55 in exceptional cases) without waiting for the mandatory age of 71 to create the RRIF. The $2000 tax credit is possible only if the funds are taken out of a RRIF and RRSP withdrawals don't qualify. If you wait until 71, you effectively lose 6 years of tax credits and there's no way to claim them retroactively.

A question: Why didn't your father apply for CPP at age 60? Of course, your mother should apply for CPP immediately after retiring (I am sorry to hear about her health) rather than waiting another 5 years. Your father should also consider income splitting when filing taxes after your mother retires, as he would still be receiving the higher of their two incomes and there may be some tax savings.
Deal Addict
Jan 3, 2013
2187 posts
461 upvotes
Sidney
btcoma wrote: . His oas and cpp combined for $600/month.
Wouldn't that make CPP $0?? I thought OAS was like $601 BY ITSELF?
Member
May 2, 2019
429 posts
489 upvotes
Vancouver
SAM3674 wrote: Are You Taking Advantage of the Pension Income Tax Credit?...

TaxTips.ca - Pension Income Tax Credit...

To be eligible, the funds from an RRSP must first be transferred to an RRIF. Then every year after age 65, you can withdraw $2000 more or less tax-free, provided you have low or minimum income.
Good information. There may be a way to save several hundred dollars while the father is still working and not getting his work pension. But when he is getting the work pension, it will already qualify for Pension Income Tax Credit, right? An annuity from a pension plan should qualify, the way I read it. So the $2000 credit will be already used and RRIF won't help further.

So many nuances. Another trick I'd consider is based on the assumption the mother's income is > 12K in 2019 and < 12K in 2020, 2021 (work pension + CPP, but not qualified for OAS/GIS/Allowance yet). If that's the case, just put several K into her RRSP in 2019 and withdraw it in 2020+2021. For example, if her expected income in 2020 is 9K, there's no tax on further 3K or so. She could contribute 6K into RRSP in 2019, for which CRA will give up to 1.2K refund the next tax season (assuming Ontario), take 3K out of RRSP in 2020 (no extra tax), take the other 3K in 2021 (no extra tax). Shouldn't get too greedy with this, because her income from RRSP in 2022 (maybe even 2021) can start affecting OAS/Allowance eligibility when her spouse retires.
favelle75 wrote: I thought OAS was like $601 BY ITSELF?
Usually yes - when you were a Canadian resident for 40+ years. If less, it's prorated. Can be as little as $150/month for the minimum residency requirement of 10 years.
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Mar 8, 2013
2680 posts
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yvrbanker wrote: Good information. There may be a way to save several hundred dollars while the father is still working and not getting his work pension. But when he is getting the work pension, it will already qualify for Pension Income Tax Credit, right? An annuity from a pension plan should qualify, the way I read it. So the 2000 credit will be already used and RRIF won't help further.
If your father puts $8000 into an RRSP over the next 4 years and opens a RRIF before the end of year, transfers at least $2000 to the RRIF, he will have 4 years of the tax credit before he takes his work pension. After that, he shouldn't need a RRIF.

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