Summary
Navigating OAS Clawback: Effective Strategies for Retirement Planning
The Old Age Security (OAS) program is a cornerstone of Canada’s retirement income system, providing a monthly payment to eligible seniors aged 65 and older. However, high-income retirees may face a reduction in these benefits through the OAS clawback. Understanding and planning for this clawback is crucial in maximizing your retirement income.
What is OAS and Who Qualifies?
OAS benefits are available to all Canadians and residents once they reach the age of 65, regardless of their work history. The primary criteria involve residency: you must have lived in Canada for at least 10 years after turning 18 to qualify. Those who have lived in Canada for 40 years after turning 18 receive the maximum benefit. However, if you reside outside Canada, the requirements become more stringent, requiring 20 years of residency after age 18.
Understanding the OAS Clawback
The OAS clawback triggers when a retiree’s income surpasses a certain threshold, set at $90,997 for 2024. The clawback rate is 15%, which can significantly impact the disposable income of high earners. For incomes reaching $148,065 (ages 65-74) or $153,771 (75 and older), the clawback can even erase the entire OAS benefit.
Strategies to Minimize the Impact
- Delay OAS Benefits: Delaying the start of your OAS benefits until age 70 can increase your monthly payments by 36%. This not only boosts your eventual payments but also provides a window to manage other retirement funds under lower tax brackets.
- Optimize RRSP/RRIF Withdrawals: Balancing withdrawals from Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) can help manage your taxable income. Early and strategically timed withdrawals can reduce the risk of hitting the high-income threshold that triggers the clawback.
- Maximize Your TFSA: Contributions to a Tax-Free Savings Account (TFSA) are crucial. Withdrawals from a TFSA are not taxed, which means they do not count towards the income threshold for the OAS clawback. Planning early withdrawals from RRSPs to fund your TFSA can be a smart move, particularly if you can do so before reaching the higher OAS clawback thresholds.
- Income Splitting: For couples, sharing up to 50% of income with a lower-earning spouse can keep individual incomes below the clawback threshold. This strategy is especially beneficial for minimizing the overall tax burden and managing retirement income efficiently.
Conclusion
Early and strategic planning is key to mitigating the effects of the OAS clawback. By understanding how different income sources impact your OAS benefits, you can better position yourself to enjoy a more financially secure retirement. Whether it’s adjusting your investment portfolio, timing your OAS benefits, or utilizing tax-saving strategies like TFSAs and income splitting, each step plays a pivotal role in optimizing your retirement outcomes.
Start planning today to ensure your retirement funds are positioned in the most tax-efficient manner possible, allowing you to maximize your benefits and reduce unnecessary tax liabilities.
Transcript
Hi everyone, today we’re going to talk about OAS clawback and strategies to avoid it. What I do is based weekly on what I’m working on. I usually highlight that topic, and today, OAS clawbacks happen to be that topic because I’m working on a financial plan for clients, and OAS came up. So let’s talk about OAS and what it is.
OAS stands for Old Age Security. Just a brief overview: it’s a monthly payment available to individuals once you reach 65 years old. It’s an important and integral part of the pension system. Unlike CPP, there’s no employment history required. That’s not a factor in eligibility. So, whether you’re working or non-working, you can qualify for OAS. Now, what’s the qualification? It has to do with your residence status.
If you’re in Canada, you must be 65 years old, a Canadian citizen or legal resident, and you must have lived there for at least 10 years after turning 18. If you have lived there for at least 40 years, you get the full maximum amount you would qualify for. Now, if you’re outside of Canada, the eligibility isn’t as lenient. You have to have lived there for at least 20 years after turning age 18. Okay, so let’s talk about the clawback.
By the way, when I talk about OAS, the OAS clawback is one of the things that people planning for retirement just don’t like. I would probably say it comes second only to pulling money from your RRSPs and finding out that it’s going to be taxed as ordinary income. That is probably the number one thing they despise when it comes to retirement planning.
And second, a close second, I believe, is the OAS clawback. So let’s look at this: the threshold and impact of OAS clawback.
The threshold for the OAS clawback starts at $90,997 in 2024. And you can get this information at Canada.ca. And if you go over it, there’s a 15% income that gets clawed back. And 15% is quite substantial, right? And once you hit…$148,065 if you’re aged 65 and 74, then essentially everything that you would have received would have completely been clawed back. If you’re 75 and older, it’s $153,771. And again, this is for this year; it changes annually. But just so you know, 15% is quite substantial. And some people say, well, I probably don’t need that amount or probably don’t have that amount. Well, your regular amount that you pull from your retirement,might be lower than the threshold, but there may be years where circumstances arise where you have to pull more than you ordinarily need. And so, in those circumstances, you will get hit with the clawback.
Now, for some folks, you may be wondering, okay, I’m not there yet. I’m thinking about it. What are the things that contribute to the clawback? Quite frankly, you could have investment portfolios, be it RRSPs or non-regs, especially RRSPs because they’re treated as ordinary income.
And you have strong performances, right? So you have elevated incomes and you’re in higher tax brackets. So now you’re more exposed to that clawback because if you have a bloated RRSP, what has to happen is, you know, when it becomes a RRIF, you have to take a minimum amount and you could be also probably getting out a pension, private and public, right? So, you know, you have to balance those things in addition to the amount you’re receiving from OAS.
And this is where the potential for the clawback. In the last couple of years, last 10 years or so, quite a few individuals, 10, 15 years have had pretty significant, pretty decent returns. And because of that, they’re now faced with this situation where they may not be pulling from their portfolios just yet, but they’re now looking to do so. And in looking to do so, they realize, OK, doing this plan, I’m going to get hit with a clawback.
Right, so today we’re going to talk about a few strategies that you could use to mitigate the clawback. One is you could delay OAS. If you delay OAS, a good advantage of that is a 36% increase in payments if you delay it to age 70, or 7.2% for each year that it’s delayed. So there’s a good financial benefit. So you might say, okay, delaying it, it gets higher. What’s the benefit? Well, it allows you for the time that you’re delaying it from 65 to 70, potentially have early withdrawals from other accounts. Now this works, of course, if your tax bracket between those years is much lower, because if you’re pulling from your RRIF, potentially what will happen is you could be paying substantial amounts of taxes.
So if you’re not working between those years, 65 and 70, it depends again on your situation. You may be able to pull some money from your RRIF or your RRSPs.And what it allows for is a lower amount that’s mandatory that you have to take once it converts to a RRIF when you are age 71. So this, in conjunction with delaying OAS, might give you some buffer, give you some opportunity for planning. So that’s one of the things you could do. The other thing you could do is maximize your TFSA as early as possible, as much as possible. And again, a lot of times you want to do this when you have some runway. You don’t just get to age 65 or 70 and just
immediately start doing that.
There may be some room, but essentially you want to start planning your retirement much earlier so you can be strategic about how you do this. Because if you’re utilizing a TFSA, a lot of times what you will be doing, depending on your situation, if for example, you have retired at age 65, you could pull from your RRSP and put in the TFSA and now when you get to age 70, when you’re about to hit that threshold and you need money, that money that you pulled from the RRSP,
Now it’s sitting in a TFSA and you could pull from the TFSA. So you may say, well, you’re pulling money from the TFSA. So isn’t that going to contribute to the income that I made that year? Actually, no. Because when you pull money from a TFSA, those withdrawals are tax-free, which makes the TFSA an excellent tool for retirement savings and an excellent tool to plan as it relates to the OAS clawback. So utilizing the TFSA as much as possible is a great way to go.
Okay, now from a tax planning perspective. If you’re seniors, if you’re a married couple, age 65 and older, you could transfer up to 50% of your income to your spouse with a lower tax rate, right? So that helps to get you below the threshold. And then if you have a spouse’s RRSP, it could be useful for couples under 65. The higher-income spouse contributes to the RRSP of the lower-income spouse receiving tax deductions at their higher rate, also lowering your income. So that’s also an opportunity there as it relates to income splitting.
You could use that to mitigate the clawback. Generally speaking, there are a few other things, but I try to keep my videos shorter. But the bottom line, in order to mitigate the clawbacks, what you really need to do is give yourself time to plan and position your assets in such a way that they are most tax-efficient, tax-efficient just generally, but also tax-efficient in the sense that you will not be,hit with that clawback because after all, it’s something that should be coming to you and why give it to CRA if there are tax-efficient legal ways for you to do so.
Hopefully, this was helpful. The big thing and I think the big takeaway here is yes, there are some strategies, well, more or less there are some tactics here, but from a strategy standpoint, you want to start planning for retirement much earlier and that way put your funds in an ideal position that you could be most tax-efficient when you retire.
Hopefully, this was helpful and I will catch you next week. Take care.
