Introduction
As retirement looms closer, understanding the nuances of the Old Age Security (OAS) clawback becomes increasingly important. For many Canadians, OAS and the Canada Pension Plan (CPP) form the backbone of their retirement income. However, higher income levels can lead to a reduction—or clawback—of OAS benefits, potentially affecting your financial stability. In this blog, we will explore the OAS clawback thresholds for 2024 and 2025, how they impact couples, and key considerations for managing your retirement income effectively.
What is the OAS Clawback?
The OAS clawback, formally known as the OAS recovery tax, is designed to reduce the OAS benefits of individuals whose income exceeds a certain threshold. If your net income surpasses this threshold, you will be required to repay part or all of your OAS benefits through a tax levied on your income tax return. This clawback is a critical factor for those planning their retirement finances, particularly for individuals and couples with significant income from various sources.
OAS Clawback Threshold for 2024 and 2025
The clawback thresholds are set by the Canadian government and are typically adjusted annually to reflect inflation and economic conditions. For 2024, the OAS clawback threshold is expected to be approximately $90,997, meaning that any income above this limit will trigger a reduction in your OAS payments. As we look ahead to 2025, the threshold will likely rise slightly, aligning with inflationary adjustments.
For couples, the situation can be particularly complex. Although the clawback is calculated individually, when both partners have substantial income, their combined earnings could result in a higher clawback, reducing the overall household OAS benefits. This makes strategic income planning essential.
Maximizing Your Income While Minimizing Clawback
A common concern for retirees is how much they can earn while collecting both CPP and OAS without triggering the OAS clawback. In 2024, you can earn up to $90,997 before the clawback starts to apply. It’s important to note that while the CPP is not directly subject to a clawback, your CPP payments do contribute to your overall income, which could push you over the OAS threshold.
For those in higher income brackets, exploring strategies such as income splitting, using tax-advantaged accounts like RRSPs and TFSAs, or deferring CPP payments might help minimize the impact of the OAS clawback.
CPP and OAS: Understanding the Interaction
While the OAS clawback receives a lot of attention, understanding how the CPP interacts with your retirement income is equally important. The CPP doesn’t have a direct clawback mechanism like OAS, but it does contribute to your taxable income, which can influence whether you hit the OAS clawback threshold.
For example, if you’re deciding between taking CPP at age 60 versus waiting until 65, consider how early CPP payments could increase your taxable income and potentially lead to a reduction in your OAS benefits due to the clawback.
The CPP schedule for 2024 outlines when and how your payments will be made, and planning these payments strategically can help you manage your overall retirement income more effectively.
Planning Ahead: OAS Clawback in 2025 and Beyond
Looking forward to 2025 and beyond, it’s important to stay informed about projected changes to the OAS clawback thresholds. The threshold is expected to continue rising, albeit modestly, which could affect your retirement planning. If your income is close to the threshold, it might be wise to plan ways to reduce taxable income, such as utilizing RRSPs, TFSAs, and income splitting with a spouse.
In addition, keeping an eye on future policy changes, such as potential adjustments to the GIS (Guaranteed Income Supplement) thresholds, could also impact your overall retirement strategy.
Why Does the OAS Get Clawed Back?
The purpose of the OAS clawback is to ensure that those with higher incomes contribute more back into the system. It’s a form of income redistribution intended to support lower-income seniors. While it might seem like a penalty, understanding how the clawback works and planning accordingly can help you maximize your benefits and minimize its impact on your retirement lifestyle.
Conclusion
Navigating the complexities of the OAS clawback for 2024 and 2025 is essential for anyone approaching or already in retirement. By understanding the thresholds, planning your income strategically, and staying informed about potential changes, you can maximize your OAS benefits and enjoy a more secure retirement. If you have specific questions or need personalized advice, speaking with a financial planner is a great next step to ensure you’re making the most of your retirement income. You may also want to consider purchasing my book, The Art of Retirement, which provides insights on how to plan for your retirement.
