If you’re approaching retirement age, you might be worried about the Old Age Security (OAS) recovery tax, also known as the OAS clawback.
If there is no clawback, the current amount of OAS pension you can receive is $615.37 per month. This number can change, check this OAS payment list from the CRA to keep up to date on the exact number.
For most people, for every dollar you have in income over $79,054 per year, you will get 15% of that deducted from your OAS pension. If you make more than $128,149, you won’t receive any OAS.
OAS clawback example:
David Smith has a net income of $99,054 for the 2020 OAS income year.
Clawback threshold: $79,054
Clawback principal: $99,054 – $79,054 = $20,000
Clawback amount: $20,000 * 15% = $3,000
David will receive $3,000 less of his OAS income and have to pay that back with the OAS recovery tax.
Note that the pay period for OAS is from a July to June period, not starting in January, for the previous year. For example, your 2020 income will determine if your July 2021 – June 2022 OAS will be clawed back or not.
If you hate the idea of having your OAS clawed back, don’t worry! Here are some promising strategies to reduce or eliminate your OAS clawback:
1. Focus on your TFSA to reduce your OAS clawback
Any increases in your TFSA from investments will not count towards income. Make sure you are getting the most out of your TFSA. If you have any non-registered investments or savings and your TFSA is not maxed out, move it over into your TFSA.
2. Defer your OAS
You can defer your OAS when you turn 65, for up to five years. By delaying, this will have two positive effects:
1) You’ll receive more OAS, as you’ll receive an increase in your monthly pension by 0.6% every month you delay. After five years, you will receive 36% more per month of your OAS!
2) By deferring your OAS, you also have the added benefit of increasing the ceiling that you can earn before not receiving any OAS. If you defer, you can earn more than the maximum and still receive some OAS. Since your OAS benefit will be higher it will take more income to claw it back.
If your income is high during age 65 to 70, consider this strategy.
3. Split your pension income with your spouse
If your spouse or common-law partner makes significantly less than you do, consider splitting your pension income. You can split up to 50% of your registered retirement income fund (RRIF), CPP, annuity income, or pension income.
4. Defer your Canada Pension Plan (CPP)
You can defer your CPP up to age 70. There are a couple of benefits in doing so. If you delay until age 70, you could withdraw 42% more than you could have at age 65. By deferring your CPP, you would have less income from age 65 to 70.
There are other factors you will need to consider, such as your health. If your health is stable you might want to consider delaying your payments until 70. By contrast, if your health is poor, it might be best not to delay taking out the payment.
Here’s a full guide to your CPP Pension – Should You Take it at Age 60, 65, or 70?
5. Take out your RRSP before age 65
By taking out your RRSP before age 65, you can declare most of your RRSP income, and this could have you fall below the OAS clawback threshold.
For example, if you’ve calculated that you’ll be making $100,000 per year, but $30,000 of that will be RRSP income if you have already withdrawn that RRSP before you’re 65, that income won’t be counted in your OAS clawback amount.
Be wary, because by doing this, you will be losing out on the tax deferral benefit of your RRSP. You have to decide for yourself whether the amount you will save on the OAS clawback is worth more than the tax deferral from your RRSP.
6. Trigger your capital gains income before 65
If you have property or non-registered investments that have built up substantial capital gains over the years, you might want to sell them and trigger the capital gains income before you turn 65 to prevent triggering OAS clawbacks.
7. Make sure you are aware of all deductions
Make sure you are deducting all you can from your income, such as any business expenses if you own a business, or interest on your mortgage if you have a rental property.
8. Using leverage to reduce your income
If you have borrowed money to earn investment income, you can write off the interest on the loan to lower your income. I would not recommend taking out debt to do this strategy, but if you’ve already done this, make sure you’re deducting that interest income.
9. Be careful of dividend income in your non-registered account
Usually, I’m a huge fan of dividend income. However, in the case of trying to reduce your income, earning dividend income can hurt you. Due to the dividend tax credit, your dividend income is grossed up 138%. For every dollar you’re earning in dividends, you will be declaring $1.38 of income.
A great way to get around this is to invest in swapped ETFs in your non-registered accounts. You get the benefits of low-cost ETFs and the diversification of it, but because the swapped ETFs don’t issue its dividends directly, you will defer the taxes until you decide to sell it. See a list of Horizon swapped ETFs here as an example.
10. Be careful of interest income in your non-registered account
Be mindful of investing in interest-only investments such as GICs and high-interest savings accounts in your non-registered accounts. 100% of the income will be included in your income calculation and could push you over the OAS clawback amount.
11. Know how capital gains affect your income in a non-registered account
Capital gains only count 50% towards your income in your non-registered accounts. Be aware of this when doing your tax planning and OAS management.
12. Contribute to your RRSP after retirement
You can still contribute to your RRSP even after you retire, up until you turn 71. If you still have some contribution room available, it could be worth it to contribute to your RRSP to reduce your income.
This could be a fantastic strategy if your income will be higher in the first few years that you turn 65 to 70. Make sure you calculate your RRIF payments carefully to make sure you’re not running into the same clawback problems as you get past the age of 71.
13. Use younger spouse age for RRIF withdrawal
If your spouse is younger than you, you can use his or her age as your minimum RRIF withdrawal amount. This will lower the amount of RRIF income you will have to claim.
Your main goal is how to reduce your income after the age of 65, so you can come under that threshold for your OAS. The OAS is “free” money from the government, so it’d be great if you can receive this! Use these tips to help avoid an OAS clawback.