Old Age Security Pension Recovery Tax: How do you avoid it?
For those 65 and older in Canada, Old Age Security (OAS) is a vital government pension program. Its goal is to give senior people a reliable source of income. The Old Age Security Pension clawback, which is essentially a recovery tax imposed whenever a retiree’s income above a certain threshold, is a crucial component of this policy, though.
For retirees, the OAS clawback is an important factor that affects their net income. Effective retirement planning requires an understanding of the clawback mechanism, the types of income that contribute to it, and measures to lessen its influence. Retirees can improve their financial status and lessen the effects of the OAS clawback by managing their income sources properly and making use of the alternatives that are available.
OAS Eligibility and Incremental Benefits
Old Age Security beneficiaries can postpone receiving their benefits until they are 70 years old, but eligibility begins at 65. Postponing the start rises by 0.6% every month results in a 7.2% yearly increase in benefits. As a result, delaying OAS may result in a notable rise in pension benefits.
The OAS Clawback Mechanics
The OAS clawback level for the 2023–2024 income year is $86,912. A retiree may have 15% of the difference between their income and the threshold clawed back if their income surpasses this cap.
For example, if a person’s income in 2022 was $100,000, the clawback amount would be 15% of the amount that year’s threshold was less than $100,000, or $2,735.85 in repayment.​
OAS Payment Adjustments
Every year in July, the OAS payments are adjusted based on the income from the prior year. For example, an individual’s 2020 OAS payment would be adjusted for the following year if their income surpassed the level.
Income Types Affecting OAS Clawback
The clawback can be triggered by a number of different sources of income, including as capital gains, taxable investments, pension payments, RRSP or RIF withdrawals, and salary. Gains from capital assets, such as rental properties, have the ability to fully recoup OAS benefits by raising taxable income.
A major factor for Canadian retirees with high incomes is the OAS clawback. Retirees can effectively minimize or avoid the clawback and maximize their retirement income by putting strategies like maximizing TFSA contributions, deferring OAS and CPP, income splitting, smart use of RRSPs, managing capital gains, choosing tax-efficient investments, and careful planning into practice.
Strategies to Avoid OAS Clawback
1. Maximizing TFSA Contributions
Because advances in a Tax-Free Savings Account (TFSA) from investments do not go toward taxable income, investing in one can be advantageous. If not already maxed, transferring non-registered funds or investments into a TFSA can help lower the OAS clawback.
2. Deferring OAS and CPP
There are a number of benefits to deferring payments for the Canada Pension Plan (CPP) and the OAS pension. It is possible to raise the monthly pension amount and the income ceiling prior to a clawback by delaying OAS for up to five years. Delaying CPP until age 70 may result in noticeably larger payouts and a decrease in taxable income for the years 65 through 70.
3. Income Splitting with Spouse
Dividing pension income can lessen the OAS clawback for individuals whose wives or common-law partners earn much less than them. This is because it lowers taxable income. This may entail dividing pension income, CPP, annuities, and registered retirement income funds (RRIF) up to 50%.
4. Utilizing RRSPs Wisely
When money is taken out of Registered Retirement Savings Plans (RRSPs) before turning 65, the majority of the income can be declared early and may be kept below the OAS clawback threshold. The trade-off is that you forfeit the RRSP’s tax deferral advantages.
5. Capital Gains and Investment Strategies
Effective capital gain management helps avoid OAS clawbacks by selling real estate or non-registered investments with significant profits prior to reaching 65. In order to lower taxable income, it’s also critical to be aware of any potential deductions, such as interest on loans taken out for investments or business costs.
6. Tax-Efficient Investment Choices
Staying below the clawback level can be facilitated by making tax-efficient investment choices, such as using Tax-Free Savings Accounts (TFSA) for dividend-producing investments or mutual fund corporations for non-RRSP investments.
7. Awareness and Planning
It’s critical to comprehend how various revenue streams impact tax computations and the OAS clawback and to make appropriate plans. This entails understanding the implications of capital gains, keeping an eye out for dividend and interest income in non-registered accounts, and possibly continuing to contribute to RRSPs after retirement.