[gregdo]

My wife has a defined benefit pension plan and someone told her that she would be better off putting any extra retirement savings in a TFSA since withdrawals won't be considered income, whereas withdrawals from an RRSP would. In retirement RRSP withdrawals would be taxed and cause clawbacks of her government benefits. Her DBP will be about $26.5K per year. Does it make sense to put extra money in a TFSA or is the RRSP still the better way to go?

 

[ghostryder]

Personally yes, I would max the TFSA first, for the very reason you suggest.

 

[MoneyGal]

It depends on her tax bracket while working and her expected DB income (and thus tax bracket) while retired.

Clawbacks of government benefits (OAS) don't start until income reaches about $66K per year.

If she expects to be under that amount, there's no expected clawback and RRSP contributions may be better (because she gets the tax deduction while working). If she expects to be at or over that amount; TFSAs may be better.

 

[kcowan]

I would max out the TFSA and then contribute to the RRSP up until the mandatory w/d would be less than $10k so as to avoid the clawback of her age exemption (which kicks in at $32k but that threshold will get indexed).

Do you get a pension? DBP Pension splitting will reduce her income from $26k and can be done whenever she starts to draw it at her option. This will generate another $2k credit for you.

 

[gregdo]

No pension for me unfortunately. Her present income is about $62K and she has about 150K in RRSPs. My income is about $80K and I also have about $150K in RRSPs.

I hadn't thought about income splitting in retirement. That certainly makes a difference. I guess we need to figure out if the income from RRSPs in retirement combined with the pension will be big enough to cause clawbacks. Does the increased value of the RRSP (factoring in the tax deduction) make a better investment than using a TFSA? Where can I find all the info on clawbacks? I can see a big spreadsheet in my future.

 

[kcowan]

The age credit is 6440 which compares favourably to the individual credit of 10382 except that it is clawed back at about 32k. The provincial credit is also another 4300. The credit is totally clawed back at 75k. The provincial credit is totally clawed back by about 60k (varies by province).

Here are the tables: Nonrefundable tax credits

Between age 65 and age 72, the RRSP withdrawals count towards these totals whereas the TFSA does not. Canadian dividend treatment also hurts in this age range because of the gross-up rules.