OAS or Old Age Security is a taxable monthly payment from Canadian Government to Canadian seniors that are at the age of 65 or older. Seniors are eligible to receive OAS taxable monthly payment if met the legal status and residence requirements.
The maximum amount that you can receive from OAS in 2018 is roughly $585 per month or $7020 per year. OAS benefit can go a long way in shoring up cash flow, particularly when investment performance is variable.
When a person’s (over the age of 65) net income exceeds a certain threshold ($75910 in 2018), their OAS benefit will be clawed back. Which being said, that person is required to pay back some of their OAS pension. Interestingly, the government does not use the term OAS clawback but OAS repayment or OAS recovery instead.
15% of excess income will be clawed back for any OAS recipients who exceed the net income threshold. In other words, $0.15 will be drawn back for every $1 of income that above the limit. The individual will receive $0 if his/her net income is over $122,843 (as of July 1st, 2018 to June 30th, 2019).
OAS Clawback amount can also be calculated by the following formula:
|OAS Clawback = 0.15 x (Net Income – Threshold amount)|
According to the Department of Employment and Social Development Canada, most of Canadian seniors receive their full OAS pension. Only around 2% of Canadian seniors lose their entire OAS benefit. In order to minimize OAS clawback effect, the following strategies might help if suited your financial situation. Make sure to advise your financial planner/advisor before proceeding with any decisions that might affect your future retirement.
It is a TAX-FREE account! It is an excellent tool to minimize your taxable income in retirement since your income from investment or savings will not be taxed, which helps eliminate OAS clawback.
Additionally, TFSA withdrawals are not taxable and will not be included in the taxpayer’s income. That being said, TFSA withdrawals will be exempted from OAS clawback. Therefore, consider withdrawing TFSA early if the account holder needs a supplemental income source for retirement.
RRSP offer tax deferral, however it is only a benefit to a point. Leaving the conversion of your RRSP until the age of 71 might lead to OAS clawback, as your minimum required RRIF withdrawals will be higher. Depending on what makes up your retirement assets, and in what proportions, converting an RRSP earlier and withdrawing it in smaller chunks over a longer period of time may be the better option.
You can contribute to your RRSP until the year that you turn 71, so continue to contribute to your RRSP if you have any contribution room left or any employment income. In the case that you are over the age of 71, you still can contribute to your spouse’s RRSP if you still have unused RRSP contribution rooms. These are some of the ideas Cascades explores to minimize your net income to avoid OAS clawback.
Not many people know that OAS clawback is calculated according to your net income as defined by the Income Tax act, which includes items like the grossed up amount of investment dividends, and excludes things like the capitals gains exemption. Matching the various types of accounts we have at our disposal (RRSP, TFSA, Taxable Savings accounts) with the different types of investments available, may help reduce the exposure to OAS clawback.
As of July 1st, 2013, the Canadian Government allows seniors to defer their OAS benefit up to 60 months (5 years) from when they are eligible. An increased amount of 0.6% will be added for each month that you delay your OAS pension. Deferring OAS could help to reduce an individual’s net income to minimize OAS clawback.
When opening a RRIF, it is required that a regular withdrawal begin. Basing the withdrawal schedule on a younger spouses age can help reduce the amount that you have to withdraw each year, which may help to minimize your net income and reduce OAS clawback.
As of 2007, retirees are allowed to split up to 50% of qualifying pension income with their spouse. Choosing to split your pension income with your spouse may help to keep your net income below the OAS threshold minimizing your exposure to OAS clawback.
The above strategies might or might not work with your financial situation and your retirement plan. Make sure to take in considerations of all factors that could affect your future years. Mutual funds, investments, capital gains, pensions, and many more factors will also influence the decision to minimize OAS clawback. Please advise professional financial advisors for specific solutions that fit your circumstance.