How do I minimize OAS clawback?
Old Age Security (OAS) is a taxable monthly social security payment program available to most seniors aged 65 and older. The OAS benefit may be available even if a person has never worked in Canada, it’s not based on applicant employment history. The term “OAS recovery tax” is used by the Canada Revenue Agency (CRA) and a general population knew it as “OAS clawback.” Justin Trudeau said that a re-elected Liberal government would increase old age security by an extra 10% once a senior turns 75, and will boost the Canada Pension Plan survivor’s benefit by 25%. While the increases to OAS mean $729 and survivor benefits would see an increase of $2,080 for seniors each year. This benefit would be indexed to keep up with inflation and would be applicable from July 2020. According to the Department of Employment and Social Development Canada, most Canadian seniors receive their full OAS pension and 2% of seniors lose their entire OAS benefit. Here are effective strategies to minimize the OAS clawback effect, which might help if suit your financial situation. Make sure you consult Retirement Shield Canada Insurance https://www.rshield.ca/ advisor before proceeding with any decisions that might affect your future retirement. Here are a few strategies advised by Retirement Shield Canada Insurance, which can be implemented to reduce clawback amounts.
- Income Splitting: Splitting of pension and other income including workplace pensions, Registered Retirement Income Funds (RRIF), utilizing spousal RRSPs, CPP between spouses and annuity payments can lower individual income for either spouse and limit or eliminate OAS clawback. To keep the net income below the OAS threshold, choose the strategy to split the pension income with your spouse to minimize your exposure to OAS clawback. This strategy works well to limit or avoid OAS clawbacks, and if the spouse has a lower income than the minimum income threshold, you can transfer up to 50% to the spouse. Other income sources such as employer-sponsored pensions, registered retirement income funds (RRIF), and we can also split-annuity income to minimize the OAS recovery tax.
- Defer OAS/CPP: CPP or OAS pensions can be deferred for up to 5 years from when they are eligible but income from OAS, CPP/QPS can’t be split. This strategy works if your income level between ages 65-70 pushes you into the income threshold for OAS clawback. Since July 1st, 2013, the Canadian Government allows seniors to defer receiving OAS-CPP pension for up to 60 months (5 years), where for every month deferred the benefit payment is increased by 0.6%. With a deferral, you become eligible for a higher monthly pension later with an increase of up to 36% (0.6% x 60) increase in OAS-CPP pension at age 70. However, note that deferring OAS or CPP will increase the benefits later down the road and could then trigger OAS clawbacks at that time.
- Prioritize TFSA Contribution: Income generated from investments or savings in Tax-Free Savings Accounts (TFSA) are tax-free, minimize the taxable income in retirement and helps eliminate OAS clawback. Additionally, TFSA withdrawals will not be included in the taxpayer’s income. Withdrawals from a tax-free savings account (TSFA) are not considered income since this account is funded with after-tax contributions. Therefore, consider withdrawing TFSA early if the account holder needs a supplemental income source for retirement.
- Utilize RRSP Contribution Room: Even in retirement, you can continue to contribute to your RRSP until you turn 71. If you are 71 & the spouse is younger and has an unused contribution room, you can make spousal RRSP contributions. Or if you have any employment income, contributing to an RRSP will lower your net income for OAS calculations. An RRSP is only a tax deferral, meaning that at some point, you must pay those taxes. Dip into your before you turn 65 so you do not lose the OAS. Leaving the conversion of your RRSP until the age of 71 might lead to OAS clawback, as the minimum required RRIF withdrawals will be higher. Converting an RRSP earlier and withdrawing it in smaller chunks over a longer period of time may be the better option.
- Early RRSP Withdrawal: Consider withdrawing from your Registered Retirement Savings Plan (RRSP) funds before age 65 because it’s tax-deferred and taxes are due at withdrawal. The minimum RRIF withdrawal rate increases by age, funds withdrawn can be re-invested in a tax-efficient account like the TFSA. The reduction in RRSP funds available later on may maximize the OAS benefit by reducing the net income and reduce OAS clawback. You can use the spouse’s age to lower the minimum RRIF withdrawal rate, which can help reduce the amount that you have to withdraw each year for tax purposes and OAS benefit calculations.
OAS is popular among seniors for many years, and candidates are impacted by the clawback. Take the maximum benefit out of it and review their investments take the professional advice of Retirement Shield Canada Insurance at “info@canadainsuranceplan.ca” or call them at 416-613-9535, 780-851-5216 & 604-409-8991. I would like to suggest taking expert advice, in case you want to save your time searching best one you can contact them for a free consultation or visit their website https://www.rshield.ca/retirement-planning/.
