Old Age Security (OAS) is an important part of retirement income for many Canadians. However, for those with higher incomes, the government implements a “clawback” that reduces OAS payments. This clawback can significantly impact retirement income, potentially reducing or eliminating OAS benefits for some seniors.
In this blog, I’ll explore strategies to help you avoid or minimize OAS clawbacks.
Understand the OAS Clawback Threshold
Knowing the income threshold at which the OAS clawback begins is crucial. For the 2024 tax year, the clawback starts when net income exceeds $86,912. The clawback increases as income rises, with OAS fully clawed back at $142,609. Understanding these thresholds helps you plan your retirement income strategy. Keep in mind that these thresholds are adjusted annually for inflation.
Split Pension Income with Your Spouse
Pension income splitting can be an effective way to reduce your individual income and avoid OAS clawbacks. This strategy allows you to allocate up to 50% of your eligible pension income to your spouse. Doing so can potentially lower both partners’ incomes below the clawback threshold. This approach works best when there’s a significant income disparity between spouses.
Utilize Tax-Free Savings Accounts
TFSAs are excellent tools for avoiding OAS clawbacks. Any income earned in a TFSA is tax-free and doesn’t count towards your net income for OAS purposes. By shifting some of your investments to a TFSA, you can generate tax-free income that won’t trigger the OAS clawback. Maximize your TFSA contributions each year to take full advantage of this strategy.
Strategically Time RRSP Withdrawals
Carefully planning your RRSP withdrawals can help manage your income levels in retirement. Consider making larger RRSP withdrawals before you start receiving OAS at age 65. This strategy can help reduce your RRSP balance and mandatory minimum withdrawals later, potentially keeping your income below the clawback threshold. Remember to balance this with your overall tax situation and retirement income needs.
Defer OAS Payments
You can choose to defer your OAS payments for up to 5 years after age 65. For each month you delay, your OAS payment increases by 0.6%, up to a maximum of 36% at age 70. This strategy can be beneficial if you have other income sources in your early retirement years. By deferring OAS, you might reduce your income in those years, avoid clawbacks, and receive higher OAS payments later.
Manage Capital Gains and Losses
Capital gains are included in your net income and can trigger OAS clawbacks. Plan your asset sales carefully to spread capital gains over multiple years. Additionally, realizing capital losses should be considered to offset gains. This strategy can help keep your annual income below the clawback threshold.
Review Your Investment Income Sources
Different types of investment income are taxed differently and can impact your OAS eligibility. Consider shifting some investments to those that generate capital gains or Canadian dividend income, which are taxed more favorably than interest income. This strategy can help lower your net income for OAS purposes. Consult with a financial advisor to ensure your investment strategy aligns with your overall retirement plan.
Leverage Life Insurance Policies
Certain types of life insurance policies, such as whole life or universal life insurance, can provide tax-advantaged investment growth. The cash value within these policies grows tax-free and, if structured correctly, can be accessed tax-free through policy loans. This can provide a source of retirement income that doesn’t count towards your net income for OAS purposes. However, this strategy requires long-term planning and should be considered as part of a comprehensive retirement strategy.
Consider Corporate Class Mutual Funds
Corporate class mutual funds can be an effective tool for managing taxable income. These funds are structured to minimize taxable distributions, often converting them to capital gains. Since capital gains are taxed more favorably than interest or dividend income, this can help keep your net income lower. This strategy can be particularly useful for those close to the clawback threshold.
Optimize Your RRSP to RRIF Conversion
When you convert your RRSP to a RRIF, you’re required to withdraw a minimum amount each year. These withdrawals count as income and can trigger OAS clawbacks. Consider converting only a portion of your RRSP to a RRIF at age 71, leaving the rest in your RRSP. You can then make strategic withdrawals from your RRSP to manage your income levels. Remember, you must convert your entire RRSP to a RRIF by the end of the year you turn 71.
Donate to Charity
Charitable donations can provide tax credits that reduce your net income for OAS purposes. By making strategic charitable donations, you can lower your taxable income and potentially avoid or reduce OAS clawbacks. Consider bunching several years’ worth of donations into a single year for maximum impact. Remember to keep all receipts for your tax records.
Who Qualifies for Maximum GIS Pension Benefits?
Who Qualifies for Maximum GIS Pension Benefits?