The Unintended Consequences of Common Investment Choices
What impact does your taxable investment income have on government programs?
For many seniors, the answer is PLENTY!
Many seniors have prudently saved their whole life because they knew retirement would one day come and they wanted to ensure an adequate income for themselves. The government does its part by offering many programs and subsidies to assist all seniors in their retirement years.
Unfortunately, many of these programs are income tested. So, the income generated from savings reduces the amount of the government subsidies – sometimes significantly. OAS / GIS, MSP, Pharmacare, Aid’s to Independent Living, and the BC housing assistance – Rental assistance and Assisted Living are all means tested and impacted by investment income. As we continue to research the topic we continue to find more and more examples where programs are helping the seniors but destroying their wealth.
The combination of all of these reductions based on investment income, especially interest, is staggering – just look at the example below.
Example:
Take a look at the dollar impact on just the Assisted Living costs. Seniors living under the Assisted Living program pay 70% of their after tax income to their respective care homes.
Typically income is made up of CPP, OAS / GIS and sometimes a pension from employment. If seniors have additional savings in non-registered or registered investments this could generate additional income generating more tax and an increasing monthly living cost (care home costs go up by 70% of additional income).
Let’s say the RRIF minimum is $500 per month ($6,000 annually) and the elderly taxpayer hais a $200,000 GIC that pays 4% interest thus generating an additional $8,000 income.
In the lowest tax bracket of 22% this increase of $14,000 in annual income generates a tax bill of roughly $3,080. This $3,080 (each and every year) may be unpalatable enough for most retirees on a fixed income but this is small potatoes when we have a look at the impact this additional income has on the amount of monthly rent they pay under the Assisted Living program. 70% of the after tax amount equates to $7,644. When you add up the 22% tax (higher if not in the lowest tax bracket) and the 70% they lose to the assisted living hike, they are left with very little of their GIC and RRIF income.
When you factor in the potential increase in all of the other programs including MSP, Pharmacare, Aid’s to Assisted Living and other’s today’s retirees are left with virtually nothing of their investment income.
If they are in a higher tax bracket and the additional income creates a claw-back of OAS then they are left with a less than zero growth rate. Their savings could even be getting smaller before they spend a dollar on themselves. Tack on inflation and their savings erode even faster.
What can You Do?
Work with a professional to employ every legal strategy available to you to reduce the amount of income that has to be reported for tax. Call 778.322.5136 or complete the request for a complimentary review below and a Certified Financial Planner will contact you within the next business day to arrange a time to start looking at your specific case and point you in the right direction.
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