modest earners can save for retirement too

The smartest way to save for modest-income earners


When you think about saving for retirement, the Registered Retirement Savings Plan (RRSP) is probably what comes to mind. But you may be surprised to learn that the Tax-Free Savings Account (TFSA) is usually a better retirement savings tool for many people.

my65+ offers a TFSA and RRSP, allowing you to grow your savings tax-free in both accounts. For those who earn $50,000 or less, the plan defaults by putting the maximum allowable amount into a TFSA and shifts any remaining amount to an RRSP account. This is done because TFSA withdrawals that are made in retirement won’t negatively impact Guaranteed Income Supplement (GIS) benefits, which approximately one third of Canadians rely on as part of their retirement income.


Modest-income individuals – TFSAs are usually best

If you earn less than $50,000 per year and do not have a workplace pension and/or a large RRSP account, you are likely better off saving using a TFSA.

One reason for this is that modest-income individuals may qualify for the Guaranteed Income Supplement (GIS). The GIS is a program for seniors at and above age 65 with modest incomes. If you qualify for maximum GIS benefits, you would get ~$11,000 / year.i

If you’re eligible for GIS, you likely won’t want to save using RRSPs because it would mean getting less GIS benefits. RRSPs must be converted to a Registered Retirement Income Fund (RRIF) by December 31st of the year you turn age 71. When an RRSP becomes a RRIF, you must withdraw a minimum amount of money each year from your RRIF. For every dollar you withdraw from your RRIF after age 65, your GIS is reduced by at least 50 cents.

There is no impact on your GIS if you save in and withdraw from TFSAs.

Another reason why TFSAs tend to work better when you have a modest income is that you are in a lower tax bracket. That means that the RRSP deduction will not be worth as much to you as someone who is in a higher tax bracket.

Saving Through…
Impact on your GIS benefits No impact Reduces GIS benefits by at least 50 cents on the dollar per RRSP dollar withdrawn

If you have already been saving in an RRSP and qualify for GIS, you may want to consider withdrawing from your RRSP to contribute to a TFSA.ii

The Government of Canada provides additional information explaining the impact of savings in non-TFSA accounts on federal income-tested benefits and credits including GIS.

Another factor to consider is the ultimate use of funds saved in either a TFSA or RRSP. If you withdraw from your TFSA, your TFSA contribution room is restored (with exceptions) at the beginning of the following calendar year.iii If you withdraw from your RRSP, your contribution room will not be restored. TFSAs may be helpful in the case of emergency situations when you might need some flexibility for temporary changes in financial needs. The Government of Canada provides additional information about TFSAs and RRSPs.