How your RRSP affects Old Age Security and GIS payments

Your RRSP grows tax-free for decades, then becomes taxable income when you withdraw it in retirement. That taxable income doesn't just affect your tax bill - it can reduce or eliminate two major government benefits: Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).

Most Canadians know about the OAS clawback at high incomes. Fewer realize that any RRSP withdrawal counts toward that threshold, or that GIS - which can be worth over $11,000 per year - disappears entirely once your income hits roughly $21,000.

OAS clawback starts at $90,997

Old Age Security pays $713.34 per month in 2024 if you qualify - that's $8,560 per year. But it gets clawed back once your net income exceeds $90,997. For every dollar above that threshold, you lose 15 cents of OAS. At $148,451 of income, your OAS disappears completely.

Your RRSP withdrawals - whether voluntary or the mandatory RRIF withdrawals that start at age 73 - count as income for this calculation. So does pension income, employment income, and investment income outside registered accounts.

Someone with $500,000 in RRSPs might think they're comfortably middle-class in retirement. But if they withdraw $40,000 per year from their RRSP, plus receive $15,000 from CPP and $8,000 from a workplace pension, that's $63,000 of income before OAS even kicks in. Add the $8,560 OAS payment, and they're at $71,560 - well below the clawback threshold.

But if they have $800,000 in RRSPs and need to withdraw $50,000 annually, plus the same CPP and pension income, they're looking at $73,560 before OAS. With OAS, that's $82,120 - still safe. The clawback risk comes with larger RRSP balances or higher withdrawal rates.

GIS disappears much sooner

The Guaranteed Income Supplement is means-tested and designed for low-income seniors. The maximum annual benefit is $11,771 for single seniors in 2024. But it phases out quickly as income rises.

For single seniors, GIS starts reducing once annual income exceeds $2,400. It disappears entirely at around $21,456 of income. For couples, the thresholds are different but the principle is the same - any income from RRSP withdrawals reduces GIS dollar-for-dollar.

Someone with $150,000 in RRSPs who withdraws $15,000 per year, receives $8,000 from CPP, and has no other income sits at $23,000 annually. That's enough to eliminate GIS entirely, even though $23,000 is hardly a high income.

This creates a cruel squeeze: you saved diligently in your RRSP for retirement, but those savings now disqualify you from benefits designed to help lower-income seniors.

TFSA withdrawals don't count

Money withdrawn from your TFSA doesn't count as income for OAS clawback or GIS eligibility calculations. Neither do withdrawals from your principal residence if you downsize, or money from a regular investment account (though the growth on that money does count as income).

This is why the TFSA becomes more valuable in retirement than many people realize. At $80,000 of income in Ontario, the RRSP gives you roughly $2,500 back in refunds today. TaxSplit.ca will show you the exact figure for your situation. But in retirement, that same money might cost you thousands in lost OAS or GIS benefits.

The catch with income splitting

Pension income splitting lets you move up to 50% of eligible pension income - including RRIF withdrawals - to your spouse's tax return. This can reduce the higher-income spouse's tax rate and potentially keep them below the OAS clawback threshold.

But both spouses need to be 65 or older for RRIF income to be eligible for splitting. And the income still exists - it's just attributed to the lower-income spouse, which might push them above the GIS threshold instead.

If you're married to someone with little retirement income, moving RRSP withdrawals to their return through pension splitting can backfire by eliminating their GIS eligibility.

The math gets complicated quickly, but the principle is simple: every dollar of retirement income has both tax consequences and benefit consequences. Plan for both.