This article is a follow-up to my previous piece titled “Understanding the OAS Clawback for Couples in 2024.” After writing that article, I realized I had not covered a few additional strategies. Here, I’ll explore more techniques to help you manage and minimize the impact of the Old Age Security (OAS) clawback, ensuring you can maximize your retirement income.
Utilize Younger Spouse’s Age for RRIF Calculations
If you have a younger spouse, using their age for your Registered Retirement Income Fund (RRIF) calculations can be beneficial. The minimum annual withdrawal from a RRIF is based on age, with lower amounts required for younger individuals. By basing the withdrawal calculation on your younger spouse’s age, you can reduce the amount you must withdraw each year. This helps keep your taxable income lower, potentially preventing you from exceeding the Old Age Security (OAS) clawback threshold. This strategy is advantageous as it allows more of your retirement savings to remain invested, potentially growing tax-deferred for a longer period.
Realize Capital Gains Early
If you have investments that have appreciated significantly, such as real estate, stocks, or mutual funds, consider realizing these gains before you turn 65 or start receiving OAS benefits. By selling these assets earlier, you can spread the capital gains over multiple years or choose a year when your income is lower, thus avoiding a spike in your taxable income that could trigger the OAS clawback. This proactive approach helps manage your overall income levels, ensuring that you stay below the threshold and minimize the impact on your OAS benefits.
Borrow to Invest
Using borrowed funds to invest can be a strategic way to manage your taxable income. When you borrow to invest, the interest on the loan is typically tax-deductible. This deduction can reduce your net income, helping you stay below the OAS clawback threshold. For instance, if you take out a loan to invest in income-producing assets, the interest payments on the loan can be deducted from your taxable income, thereby lowering your overall income and reducing the clawback. This strategy requires careful planning and understanding of investment risks, so it is advisable to consult with a financial advisor.
Capital Gains Management
Timing the realization of capital gains is a crucial strategy in managing your taxable income. If you control the sale of assets that generate capital gains, consider spreading these sales over several years or realizing them during a year with lower income. For example, selling a portion of your appreciated assets incrementally rather than all at once can help smooth out your income, preventing a large one-time increase that could trigger the OAS clawback. This approach helps manage your income levels more effectively, allowing you to maximize your OAS benefits.
Waiver for Undue Hardship
If the OAS clawback creates significant financial hardship, you can apply for a waiver from the Canada Revenue Agency (CRA). This involves completing Form T1213(OAS), which requests a reduction in the clawback due to undue hardship. The CRA considers factors such as unexpected financial burdens or significant drops in income. If granted, this waiver can provide temporary relief, ensuring that you do not lose your OAS benefits due to a temporary increase in income. This option requires providing detailed documentation and justification, making it essential to work with a financial advisor to ensure your application is well-prepared.
Income Review and Adjustment
Regularly reviewing and adjusting your income sources is crucial for managing the OAS clawback. If your income varies significantly from year to year, the CRA can review and adjust your OAS clawback obligations accordingly. For instance, if you experience a one-time increase in income due to a sale of an asset or a large bonus, but anticipate lower income in the following years, you can apply for an adjustment based on your projected lower income. This proactive approach ensures that you do not overpay due to temporary income spikes, allowing you to maintain more of your OAS benefits.
Conclusion
Managing the OAS clawback effectively requires a comprehensive approach, involving careful planning and strategic financial decisions. By utilizing strategies such as basing RRIF withdrawals on a younger spouse’s age, realizing capital gains early, borrowing to invest, managing capital gains timing, applying for hardship waivers, and regularly reviewing and adjusting income, you can optimize your retirement income and minimize the impact of the clawback. Consulting with a financial advisor is essential to tailor these strategies to your specific financial situation, ensuring you make the most of your OAS benefits and enjoy a financially secure retirement.
