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Did you know that, in a limited number of circumstances, you can increase the amount of Canada Pension Plan (CPP) benefits you receive each month?
It's not common knowledge, but it's true. The main way to do this is to revoke your decision to receive benefits and start accruing future benefits again. You can do this if you received benefits for the first time within the last 12 months. You can also reduce your after-tax CPP by claiming tax breaks that reduce your taxable income. In this article, I'll explore the two main ways you can boost your CPP pension in 2024, assuming you're already receiving benefits.
Reverse the decision to receive benefits
If you started receiving CPP benefits for the first time in the last 12 months, you can reverse your decision to receive benefits. Doing this could result in you earning more CPP in the future. Your CPP benefits increase a little each year for each year you delay receiving them after age 60. After age 70, no more benefits accrue.
Reduce your after-tax CPP amount
You can increase your after-tax CPP amount by reducing your taxable income. There are many ways to reduce your taxable income (claim more tax breaks, work fewer hours, etc.). One of the simplest is to make contributions to a Registered Retirement Savings Plan (RRSP). Making RRSP contributions provides you with a tax deduction that reduces your taxable income. If you make an RRSP contribution in a given year, you will receive a tax refund the next year. If CPP is your only income, then the refund you receive represents “recovered” CPP money.
Now, making RRSP contributions just to take home more CPP is not a great idea. RRSP contributions are generally not worth it unless you are seeing positive investment returns on your account. Earning such returns is one of the keys to using your RRSP correctly.
As for what types of investments you should hold in your RRSP, index exchange-traded funds (ETFs) like iShares S&P/TSX Limited Composite Index Fund (TSX:XIC), are a great place to start. These funds are extremely diversified, which reduces the risk inherent in them. As a result of this risk reducing the quality of ETFs, they require less research and financial knowledge than individual stock holdings.
We can use XIC as an example of a fairly typical index fund. It's a fund that tracks the S&P/TSX Capped Composite Index, the 240 largest Canadian stocks. XIC actually owns 226 of those stocks, making it fairly representative of the index on which it is based.
226 shares is a considerable number, giving XIC a significant diversification benefit. The fund also has a very low management fee (around 0.04%) and trades in high volume, further reducing transaction costs. Overall, it's an asset worth considering keeping in your RRSP.
None of this means you should go out and start investing in an RRSP just to take home more CPP. RRSP contributions aren't worth it just for the tax break; They need to produce investment returns to make it worthwhile. However, in general, investing in an RRSP is a good idea.