If you’re receiving Canada Pension Plan (CPP) benefits or plan to apply for them, you might be concerned about the Old Age Security (OAS) clawback. The OAS clawback occurs when your annual income surpasses a government-set threshold, resulting in a reduction of your OAS payments. For the most recent tax year, any income exceeding $90,977 triggers a reduction of $0.15 for every dollar earned over that limit.
In simple terms, for every $1,000 you earn above the threshold, you lose $150 of your OAS benefits. If your total income exceeds $149,000, you could lose your entire OAS entitlement, which can amount to up to $7,040 annually. The clawback is assessed during your annual tax return and will begin in July of the following year.
Understanding how the OAS clawback works, along with how your CPP benefits impact your overall income, is essential for managing your retirement finances effectively and ensuring you maximize your benefits.
How the OAS Clawback Operates
The OAS clawback, also known as the OAS Recovery Tax, reduces your OAS payments based on your net income. It is calculated annually, according to your income reported in your tax return. The higher your income, the greater the clawback, and if your income exceeds the set threshold, you could lose all of your OAS payments.
CPP payments are included in your total income, which means they can contribute to the OAS clawback. For example, if you have $80,000 in income from other sources and receive an additional $20,000 from CPP, your total income of $100,000 would push you above the threshold, resulting in a partial OAS clawback.
Strategies to Minimize or Avoid the OAS Clawback
There are several strategies you can use to reduce or avoid the OAS clawback. Below are some effective ways to keep your net income under the clawback threshold:
Delay Your CPP Benefits
One of the most effective ways to avoid the OAS clawback is by delaying your CPP benefits. While OAS payments start at age 65, CPP benefits can be deferred until age 70. By postponing your CPP benefits, you can keep your income lower in the early years of retirement, which may help you avoid the OAS clawback.
Additionally, delaying your CPP benefits can increase your monthly payments. If you wait until after age 65 to start receiving them, your CPP benefits increase by 8.4% per year, providing you with higher payouts when you eventually begin collecting them.
Reduce Employment or Pension Income
Another option is to reduce your employment income or pension income if you’re still working or receiving income from pensions in your 60s. By decreasing your working hours or opting for a lower income distribution, you can lower your overall taxable income, keeping it below the OAS clawback threshold and preserving your full OAS benefits.
Maximize Tax Deductions
Utilizing available tax deductions is another way to reduce your net taxable income and avoid the OAS clawback. Common deductions include medical expenses, charitable donations, and other eligible expenses. By maximizing these deductions, you can lower your overall income and mitigate the impact of the OAS clawback.
For instance, medical expenses that exceed 3% of your net income or charitable donations to registered organizations are tax-deductible. Properly documenting and claiming these deductions can significantly reduce your final income assessment.
Contribute to an RRSP
Contributing to a Registered Retirement Savings Plan (RRSP) is an excellent way to reduce your taxable income. RRSP contributions are tax-deductible, meaning they directly lower your net income for the year. By contributing to an RRSP, you can potentially bring your income below the OAS clawback threshold.
Not only does contributing to an RRSP help you avoid the clawback, but it also allows your savings to grow in a tax-sheltered environment until withdrawal.
OAS Clawback at Different Income Levels
Here’s an estimate of the OAS clawback based on different income levels:
| Income Level (CAD) | Clawback Rate (15%) | OAS Clawback Amount (Approx.) |
|---|---|---|
| $90,977 – $100,000 | 15% | $1,350 |
| $100,001 – $110,000 | 15% | $2,850 |
| $130,000 – $140,000 | 15% | $7,350 |
| $149,000+ | Full Clawback | Complete OAS Reduction |
Additional Strategies to Avoid the OAS Clawback
Beyond the main strategies mentioned, there are other ways to reduce your taxable income and keep your OAS payments intact:
Spousal Income Splitting
If you’re married or in a common-law relationship, you may be able to reduce your taxable income through spousal income splitting. This involves allocating some of your retirement income to your spouse, especially if they have a lower income. This approach can effectively lower your combined taxable income and help you stay under the OAS clawback threshold.
Use Your Tax-Free Savings Account (TFSA)
Withdrawals from a Tax-Free Savings Account (TFSA) do not count as taxable income, unlike RRSP withdrawals. Therefore, using a TFSA for retirement expenses, rather than pulling from other taxable sources, can help you manage your income and avoid the OAS clawback. Having a well-funded TFSA offers flexibility in retirement and helps you better manage your finances.
Final Thoughts on Managing the OAS Clawback
While the OAS clawback can significantly affect retirees, careful planning can minimize or even eliminate it. Delaying your CPP benefits, reducing employment income, maximizing tax deductions, contributing to an RRSP, and employing income-splitting techniques are all effective ways to avoid losing your OAS benefits.
It’s highly recommended to consult with a financial advisor to tailor these strategies to your unique financial situation. Proactive planning can help you enjoy a secure retirement while retaining more of your OAS benefits.
