The Old Age Security (OAS) program is crucial to many Canadians’ retirement income. However, the OAS clawback can significantly reduce this benefit for those with higher incomes. This article discusses 7 savvy strategies to help you avoid or minimize the OAS clawback.
Time your RRSP/RRIF withdrawals
Plan your RRSP or RRIF withdrawals carefully. Consider taking larger withdrawals in years when your other income is lower. This can help keep your total income below the OAS clawback threshold in higher-income years. Remember, you can withdraw more than the minimum required amount from your RRIF if it makes sense for your overall tax strategy.
Use your TFSA strategically
Maximize your TFSA contributions. Unlike RRSP/RRIF withdrawals, money taken from a TFSA doesn’t count as income for OAS clawback calculations. Consider shifting some of your savings to a TFSA before retirement. This can provide tax-free income in retirement without affecting your OAS benefits.
Split pension income with your spouse
If you have eligible pension income, you can split up to 50% with your spouse. This can help lower the higher-earning spouse’s income, potentially reducing or eliminating the OAS clawback. Pension splitting can be done on your tax return each year, allowing you to optimize the split based on your current situation.
Delay OAS payments
You can delay receiving OAS for up to 5 years after age 65. For each month you delay, your payments increase by 0.6% (7.2% per year). If you expect your income to decrease in the future, delaying OAS could help you avoid the clawback and receive higher payments later.
Manage capital gains and losses
Be strategic about when you sell investments to realize capital gains. If possible, spread these sales over several years to avoid a significant income spike. Also, consider realizing capital losses in years with high income to offset gains and reduce your net income.
Review your investment income sources
Look at the types of investment income you’re generating. Interest income is fully taxable, while Canadian dividends receive preferential tax treatment but can actually increase your net income for OAS purposes due to the gross-up. Capital gains are only 50% taxable. Adjusting your investment mix could help manage your taxable income and OAS clawback.
Optimize Your CPP Start Date
The age at which you start taking Canada Pension Plan (CPP) benefits can affect your OAS clawback. If you delay CPP, your payments will be larger but might push you over the OAS threshold. On the other hand, taking CPP earlier could result in lower payments that keep you under the threshold. Consider your overall retirement income plan when deciding when to start CPP to minimize OAS clawbacks.
