Canada: Can you save too much in your Registered Retirement Savings Plan (RRSP)?
I know it sounds ridiculous.
Saving TOO MUCH in your retirement plans?
This is definitely a #RichPersonsProblem, but nonetheless, one that exists.
However, it is true that the government will claw back in your government pensions that you have paid into from your salary as an employee, if you are deemed to have too much saved in your Registered Retirement Savings Plan (RRSP).
OMG. Should I stop saving now?
I am just warning all of you super savers out there to NOT rely on your government income at 100% if you are also saving a shedload of money in your RRSPs.
Please, keep saving.
It is far better to rely on yourself, your accounts and YOUR SAVINGS in your name, than some nameless, generic, communal government pot where the number might change or disappear completely by the time your retirement rolls around.
Heck, we could all be working until we are 80 to get access to this money with the way things are going.
Or maybe the entire Earth will self-destruct by then to eliminate all of us idiotic humans who can’t seem to figure out how to wean ourselves off plastic, oil, and to be smarter about using less and creating less waste… but that’s another
rant discussion for another day.
Long story short, if you save a lot in your RRSP (which I highly encourage that you do), just rely on that money as your retirement funds, and not on anything else.
What are the government retirement plans?
Take a gander at your payslips, and you will see deductions for plenty of things.
- Income Taxes — which fund Old Age Security (OAS) but doesn’t actually say “OAS”
- Canadian Pension Plan (CPP) – Actually what you will see on your slip
- Defined Benefit Pension (DBP) – Your company pension plan if you have one
The more you expect from the government, the less they expect you to have saved on the side.
The more you save on the side, the less they expect to give you.
What’s the difference between OAS & CPP?
Won’t talk about DBP because that’s just between you and your employer, and whatever you contribute or they contribute is what you should get.
OAS = Government Pot
Qualifications = You’re a resident of Canada
Death = When you die, payments stop
Split Income Possibility = No. You can’t share the income with a spouse to lower taxes
They take taxes from employees and dump it into a communal pot, stir stir stir for 40+ years, and dole out until there is nothing left and people freak while waiting in line.
If there are less young folk like me contributing to the pot (I am a freelancer, I have an excuse), and more older folk retiring and taking from said pot, this means the pot is not getting refilled at an acceptable rate to keep this trucking along by the time we get to retirement.
It is like hot pot – if you don’t contribute any food to the communal hot pot to cook to eat later, there is no food left.. in said hot pot for later on.
CPP = Not contributed to by the government, but by you
Qualifications = How much did you pay into it during your working career?
Death = When you die, you can get CPP transferred to your spouse
Split Income Possibility = Yes. You can split the income with your spouse to lower taxes. You put in $900, they put in $100, you can each take $500.
You and your employer, contribute to this via your paycheque.
This is not government-funded via taxes.
To get some major CPP benefits, you need to have contributed 83% of the time or 39 years. You can go to your Service Canada account and click on CPP to see Statement of Contributions.
There is no CPP Clawback Tax
Only applies to OAS.
OAS Recovery Tax
This only applies when:
- You are receiving OAS, so your income is therefore subject to tax
- On your worldwide income (not just Canadian)
- Calculated annually – if you have too much income one year, but none the next, you will get clawed back the first year, not the second
On the CRA website it states for the year 2020 if you make between $79,054 to $128,137 you must pay back part or all of the OAS you receive.
So if you made let’s say $90,000 (middle threshold):
$90,000 – $79,054 = $10,946
You are $10,946 OVER the threshold in income.
You need to pay 15% or $1641.90 back to OAS.
So if you made $128,138 (maximum threshold):
You are $1 over the maximum you’re allowed to make while applying to OAS, and you will get NOTHING from OAS.
They will claw back ALL amounts given. 100%.
Now for a few little things I observed for OAS clawback:
Loophole! They look at each individual income
They are looking at each person not at the household RRSP.
This means a lower earning spouse who contributes less to the pension plans, can max out their RRSP if you transfer funds over to them, and you won’t over save in your accounts and get a lot clawed back.
Loophole! What about freelancers?
I own my own company but I don’t take a salary, I take dividends instead, and because I have no defined salary, I do not contribute to OAS, CPP or a company DBP (my boss is a hardass LOL..).
I pay company taxes, and then I pay personal taxes on the dividends I take from retained earnings each year.
I contribute nothing to the government piggy bank, so I expect nothing.
So technically… I am in the “expected retirement income” bracket of $15,000 or lower. I think the slip of paper I got from the government said to expect $109 a month or $1308 a year from the government.
This is fine by me because I plan on having a chunk of money saved in my own name, in my own accounts and to not rely on the government anyway.
For you employees however, this is a tougher pill to swallow because you are all diligently saving like good grasshoppers (especially you all with super high incomes that max out your RRSP annually to the tune of almost $20K a year) but then the government goes and yoinks away your expected income because… you saved too much. *eye roll*
In a way, I see it as being fair or at least ‘even’ from a societal point of view. I can’t say right now if I agree with it totally because I am very much of the train of thought of: If I saved it, why should I have to pay for someone else who spent every penny and wasn’t responsible? ... but I can see how in theory, the richer ones in society, pay to help the poorer ones in retirement, kind of like wealth redistribution.