November 1996

Strategies to Minimize
Seniors Benefit Clawback

© Talbot Stevens

Last month's Strategy Sheet outlined how the Seniors Benefit could change retirement planning in the most fundamental way.

Following are several general strategies to minimize the Seniors Benefit clawback.

Because many Canadians will withdraw their RRSP funds at a higher tax rate, it is essential to define the minimum holding period required for RRSPs to still make sense.

Since all sources of income will claw back the Seniors Benefit, it makes sense to minimize your retirement income needs by being debt and mortgage free.

Financially, cohabiting will be better than remarrying.

Reverse mortgages will become very popular. Even for those with adequate funds, reverse mortgages on your principal residence will offer tax-free money that may not be considered income (we'll see later), hence avoiding the clawback.

Relative to RRSPs, all non-registered investments — those not sheltered inside an RRSP — become more attractive, especially if we acknowledge that very few people reinvest their RRSP tax refund.

This is especially true of capital gain investments like equity mutual funds. Capital gains grow tax-deferred in the same way that RRSPs do, you only pay tax on three-quarters of your gains, and you have the flexibility to defer taxes until death as opposed to forced RRIF withdrawals.

Timing strategies. Generally, it makes sense to take income before age 65, rather than immediately after.

Why wait until age 65 to take CPP if it will result in a 20% clawback? Take it as early as possible, age 60, while you still can.

Partial or full RRSP withdrawals before age 65 may make sense to some degree.

Early retirement has become more practical, especially for those with flexible pensions. Assuming that you need the insurance, using universal life insurance as a savings vehicle becomes more appealing for similar reasons.

Advanced strategies. Note that these strategies, especially at a senior age, are not for everyone and should only be contemplated with the guidance of a trusted advisor.

Any strategy that produces a tax deduction after age 65 reduces the clawback. Leverage and tax shelters become more attractive.

Drawing from a line of credit, secured by investments or a life policy, is not “income” and hence avoids both tax and the clawback.

Bottom line. To maximize your after-tax, after-clawback income, it is critical to totally re-evaluate all investment strategies, especially RRSPs. More complicated solutions, dependent on your individual situation, are required.

Not getting professional advice could mean losing 20% to 50% of your retirement income for not one year — but for life.

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