But, before we go there, are you aware that you don’t have to start your Canada Pension Plan (CPP) benefits and Old Age Security (OAS) at age 65? Let’s do a quick recap on delaying CPP and OAS, and then tackle your RRSP versus TFSA question.
Should you delay CPP and OAS to after 65?
CPP benefits increase by 0.7% for every month delayed past your 65th birthday, working out to an annual increase of 8.4%. Plus, the CPP benefit is based on the average yearly maximum pension earnings (AYMPE)—the maximum salary amount on which you need to contribute to the CPP—over the last five years.
If that average grows faster than the consumer price index, the CPI, then you will have to earn more than 8.4% to match your CPP if you delay one year. This is because once you receive CPP, it’s indexed to the CPI and not to the AYMPE.
OAS benefits increase by 0.6% for every month delayed past your 65th birthday, which is 0.1% less than the CPP increase. It works out to an annual increase of 7.2%. The other notable difference between the CPP and the OAS is that your OAS will start to be clawed back if your net income is over $90,997 in 2024. There’s an OAS recovery tax of 15% on every dollar earned above $90,997.
You must apply to start your CPP, whereas OAS starts on its own and it is up to you to apply to stop the OAS within six months if you want it delayed. If your plan is to start drawing on CPP and OAS to invest, you may not want any of that tax withheld. This is so you can invest the full amount.
There’s another thing to think about with CPP and working past age 65. If you haven’t maximized your CPP it may be better to delay and use the extra working year to build more CPP credit. If you start your CPP and work past age 65, you will still be making CPP contributions, earning the less valuable post-retirement benefit unless you complete this form to stop making CPP contributions.
Okay Gary, why did I spend time reviewing CPP and OAS? Simply to say that a guaranteed 8.4% return on the CPP, which is indexed for life, is a good investment.
Are you sure you can do better? The same goes for the OAS, plus if your income is over $90,997, consider delaying OAS because you’re going to lose some to clawback.
Hello, and thanks for this information. I’m 77, still working part time and deriving my income from work, dividends and CPP/OAS. I recently moved some of the dividend producing stocks to my TFSA, reasoning that those dividends and any future capital gains will no longer be taxable. Am I right? If so, I plan to move as much as possible each year to the TFSA.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
One additional consideration is the impact on beneficiaries upon the contributor’s passing. While both the RRSP and TFSA can be rolled over to a spouse (with some differences in definitions, etc), when the beneficiaries are not the spouse, there could be a large tax bill on the RRSP inheritance, and none on the TFSA inheritance. That’s why my spouse and I are maximizing our TFSA contributions at the start of each year, taking the income we need from the dividends in our TFSA’s during the year, and pulling from our RRSPs to restock the TFSA the following year. Eventually the TFSA will be maximized and the RRSP minimized, making for a more tax efficient estate. At least that is how I understand the rules today.