As we move halfway through 2024, couples need to understand how the Old Age Security (OAS) clawback might affect their finances. The OAS clawback, also known as the OAS recovery tax, can significantly impact the amount of OAS benefits you receive if your income exceeds a certain threshold.
For 2024 (July 2025 to June 2026), the threshold for the OAS clawback starts at an individual income of $90,997. If your combined income as a couple surpasses this limit, you may see a reduction in your OAS benefits. The clawback rate is 15% of the amount by which your income exceeds the threshold.
Key Points to Consider:
Income Threshold: The clawback threshold for 2024 is $87,000 per individual. This means if each partner’s income is below this amount, the clawback may not apply. However, if one or both partners have an income above this threshold, the clawback will reduce your OAS benefits.
Calculation: The OAS clawback is calculated at a rate of 15% for every dollar of income over the threshold. For example, if your income is $95,997, the clawback would be 15% of $5,000 ($95,997 – $90,997), which equals $750.
Strategies to Minimize the OAS Clawback
- Income Splitting:
- Pension Income Splitting: If you receive eligible pension income, you can split up to 50% of it with your spouse or common-law partner. This can help reduce the taxable income of the higher-income spouse, potentially bringing both partners’ incomes below the clawback threshold.
- CPP Splitting: If both partners are receiving Canada Pension Plan (CPP) benefits, you can share these benefits to balance your incomes.
- Tax-Free Savings Account (TFSA):
- Maximize TFSA Contributions: Unlike RRSP withdrawals, TFSA withdrawals are not considered taxable income. Contributing to a TFSA allows your investments to grow tax-free and can provide a source of income that won’t trigger the OAS clawback.
- RRSP/RRIF Management:
- Strategic Withdrawals: Carefully plan your withdrawals from Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). Consider withdrawing from these accounts before you start receiving OAS or in years when your income is lower.
- RRSP to RRIF Conversion: Convert your RRSP to a RRIF at a time that makes sense for your income level. The mandatory withdrawals from a RRIF can be managed to stay under the clawback threshold.
- Defer OAS Benefits:
- Deferral: You can choose to defer your OAS benefits for up to five years, which increases the amount you receive when you start. This strategy can be beneficial if you anticipate your income will be lower in the future, thus avoiding the clawback during high-income years.
- Charitable Donations:
- Tax Deductions: Making charitable donations can reduce your taxable income. The charitable donation tax credit can help lower your income, potentially keeping it below the clawback threshold.
- Income Timing:
- Manage Investment Income: If possible, control the timing of when you receive investment income, such as capital gains or dividends. This can help in smoothing out your income across different years to avoid exceeding the threshold in any single year.
- Defer Income: If you have control over the timing of certain income (such as self-employment income or bonuses), consider deferring it to a year when your income is lower.
- Use of Non-Registered Investments:
- Tax-Efficient Investments: Consider investments that generate capital gains or eligible dividends, which are taxed at a lower rate compared to interest income. This can help manage your overall taxable income.
- Spousal RRSP:
- Contribute to Spousal RRSP: If one spouse has a higher income, contributing to a spousal RRSP can help in income splitting during retirement. The withdrawals will be taxed in the hands of the lower-income spouse, potentially reducing the overall taxable income of the couple.
- Defer OAS Benefits:
- Deferral: You can choose to defer your OAS benefits for up to five years, which increases the amount you receive when you start. This strategy can be beneficial if you anticipate your income will be lower in the future, thus avoiding the clawback during high-income years.
- Delay Canada Pension Plan (CPP) Benefits:
- Deferral of CPP: Similar to OAS, you can defer your CPP benefits up to age 70. Deferring CPP not only increases the monthly benefit you will eventually receive but can also help keep your current taxable income below the OAS clawback threshold.
Final Thoughts
The OAS clawback can significantly impact your retirement income, but with careful planning and strategic financial management, you can minimize its effects. Stay informed, review your financial situation regularly, and consult with a financial advisor to develop a comprehensive plan tailored to your needs. By implementing these strategies, you can make the most of your OAS benefits in 2024 and beyond.
If you have any questions or need personalized advice, don’t hesitate to reach out to me or purchase my book title “The Art of Retirement”.
