RRSP vs TFSA: tax brackets, retirement, tax credits and OAS clawback

On March 25, 2020 Julie Brough CFA®, CFP®, Executive Vice President and Portfolio Manager of Logan Wealth Management hosted a webinar entitled: RRSP vs TFSA: Is there a right answer?  A Video of this webinar can be found here.

 PART 2 OF 2

How do you take advantage of shifts in marginal tax bracket?  How do you find the right balance between RRSPs and TFSAs during retirement?  How do you maximize tax credits in retirement and avoid the OAS clawback? 

How to take advantage of shifts in your marginal tax bracket

  • Consider deferring contribution to RRSPs until your income is higher. For example, if you are just starting out in your career, it makes sense to make TFSA contributions first, and wait until you are in a higher tax bracket to make RRSP contributions.
  • Using TFSAs when you are young provides flexibility when you’re trying to get established. You can withdraw funds on an after-tax basis, and you will be able to replenish it later.
  • If your income is irregular, (if you’re a small business owner, if bonuses are part of your compensation, etc.), it might make sense to defer contributing to RRSPs and accumulate room so you can take advantage of the tax reductions during years when your income is higher.
  • You may be able to take advantage of a one-time opportunity during the last year you work before retiring. If you are in a high marginal tax bracket you could contribute to RRSPs.  The following year, when your income is presumably lower since you are no longer working, you will be able to withdraw those funds at a lower tax bracket and receive the tax benefit not long after you made the contribution.

Finding balance between RRSPs and TFSAs during retirement

Just as you want to use your RRSP room when your income is high, you want to manage your income during retirement, if possible, to prevent moving into a higher marginal tax bracket.

Ontario Marginal Tax Brackets 2020

Figure 1

If, for example, you have a $95,000 income and you need an extra $15,000 one year, you may want to take those extra funds from TFSAs instead of from RRSPs (or RRIFs) so you don’t move from a 31.00% marginal tax rate to a 38.29% one (Figure 1).

Tax credits available when you are 65 and older

There are various tax credits for people age 65 and older.

You want to maximize tax advantages over your lifetime.  If you have a lot of money in your TFSAs and very little in RRSPs, you may give up some tax advantages over the years.

Figure 2

Figure 2 shows a list of the current amounts for several personal tax credits. Everyone gets the personal tax credit ($13,229).  If your spouse has a low income you can claim their personal tax credit amount ($13,229).  Everyone over age 65 receives an age credit ($7,637).  If you have a pension or RRIF income you receive a pension credit ($2,000).

You may also be eligible for other credits such as the caregiver credit ($6,788), the disability credit ($8,576), and a credit for medical expenses.

Managing tax credits when you are 65 and older

  • Ensure you have sufficient taxable income. This means ensuring you have sufficient funds in your RRSPs in order to take advantage of all tax credits.  If you don’t, you may have paid tax throughout your working years on money that you could have put into RRSPs that could be taken out now tax-free
  • This is especially important for people between retirement andge72, when it is possible for individuals to use alternate sources of funds before beginning to withdraw from RRIFs. By allowing your taxable income to drop during this period, you could leave money on the table
  • RRIF income and pension income may be split between spouses, which allows you to maximize credits for both spouses.

Old Age Security clawback

In 2020, everyone is entitled to receive approximately $7,200 of Old Age Security.  But, if your income exceeds $79,054, OAS will be reduced (clawed back) by 15 cents on every dollar of income above this amount.  If your income exceeds $128,000, OAS is fully clawed back.  At this amount your average tax rate (not marginal tax rate) will be approximately 3.3% higher.

The balance between withdrawing from RRSPs/RRIFs and withdrawing from TFSAs comes into play again here.  If you need additional money but taking it will push your income over the $79,054 threshold and trigger a clawback, you may be able to minimize or avoid the clawback altogether if you withdraw those funds from TFSAs, instead of from RRSPs/RRIFs.

Figure 3

Using the example scenario in Figure 3, the total income of $78,600 is only slightly less than the $79,054 threshold when the OAS clawback kicks in.  In this case it may be best to take the extra funds required ($6,400) from a TFSA instead of from a RRIF so the clawback won’t be triggered.

Summary of Blog Parts 1 and 2: Finding the right balance between RRSPs and TFSAs

Here are three things to keep in mind:

  1. Look at what your current income is and what your future earnings expectations are and skew your current contributions accordingly. If you are young and have a low income you might want to make higher TFSA contributions. If you earn a large bonus one year you will probably want to contribute more to RRSPs.
  2. Understand what your minimum earnings are in order to be able to avail yourself of all personal tax credits available to you when you’re in retirement. This means ensuring your RRSPs are sufficient in size to take advantage of these credits.  (If you assume a 5% withdrawal rate from RRIF accounts, you can make a rough estimate of the minimum amount you’ll need to have in it in order to be able to use all the tax credits.)
  3. Understand your likely income needs based on your lifestyle requirements. Consider how much income you have coming in that is fixed.  If, for example, you and/or your spouse have pensions you will already have fixed sources of income that are taxable.  You may therefore want to withdraw more from TFSAs to meet your lifestyle requirements.  Conversely, if you don’t have pensions, you may want to make higher RRSP withdrawals so you can ensure you have a minimum income.  You’ll always want to keep your tax rate low and withdraw from TFSAs when you need additional funds so you can minimize or avoid the OAS clawback.


Disclaimer: Please note that the information presented here is intended as general information only.  It reflects the thoughts and opinions of Logan Wealth Management and should not be construed as investment advice. Please consult your adviser to determine whether this information is applicable to your personal situation.