In Canada, the Old Age Security (OAS) clawback and the Canada Pension Plan (CPP) benefits are crucial sources of income for retirees. However, the OAS clawback can reduce the amount you receive if your income exceeds certain thresholds. Understanding how to manage your finances to avoid this clawback, while protecting your CPP benefits, is essential for maintaining financial stability in retirement. This article will guide you through strategies to minimize or avoid the OAS clawback and preserve your CPP benefits
What is the OAS Clawback?
The OAS clawback, also known as the Old Age Security recovery tax, is a mechanism that reduces the amount of OAS you are eligible to receive if your income surpasses a certain threshold. The clawback begins when your net income exceeds the prescribed amount, and for every dollar of income above the threshold, you lose 15 cents of your OAS payments.
The OAS clawback is calculated on your income from all sources, including pension income, investments, and other earnings. If your income is too high, you may find yourself with little to no OAS payments, which could significantly impact your retirement finances.
What Is the Threshold for the OAS Clawback?
The income threshold for the OAS clawback is updated annually by the government and is based on your net income from the previous year. For 2023, the threshold is $81,761 for individuals and $131,121 for couples. If your income exceeds these amounts, the clawback will begin, reducing the amount of OAS you receive.
It’s important to note that the clawback is gradual. For every dollar you earn above the threshold, your OAS benefits decrease by 15%. This means that if your income is well above the threshold, you could lose all of your OAS payments.
How to Avoid the OAS Clawback
While you can’t directly control some sources of income, there are several strategies you can implement to minimize or avoid the OAS clawback:
- Manage Your Retirement Income
Planning your retirement income is the first step in avoiding the OAS clawback. One strategy is to manage your income so that it stays below the threshold. You can achieve this by:- Contributing to Tax-Deferred Accounts: Consider contributing more to your RRSP (Registered Retirement Savings Plan). This allows you to reduce your taxable income, which may help you stay below the OAS clawback threshold.
- Minimizing Taxable Investment Income: If you have investments outside of tax-deferred accounts, consider minimizing the income they generate during retirement. This might include investing in tax-efficient funds or using tax credits to offset investment income.
- Splitting Income with a Spouse: If you’re married or in a common-law relationship, consider income splitting with your spouse. By redistributing income, you may be able to lower both partners’ taxable income, potentially keeping both individuals under the clawback threshold.
- Delay Starting Your OAS Payments
Another effective strategy is to delay your OAS payments. The government allows you to defer taking your OAS until you turn 70. For each year you delay, your OAS benefits increase by 0.6%. This means that if you wait until age 70 to start receiving OAS, you could receive 36% more than if you start at age 65.
Delaying OAS can be beneficial if you don’t need the payments right away and want to avoid the clawback. By deferring your OAS, you also give yourself more time to manage other sources of income, such as your CPP or private savings.
- Optimize Your CPP Benefits
The Canada Pension Plan (CPP) benefits are separate from OAS and are not subject to the clawback. To maximize your CPP benefits, you can:- Start CPP Early or Delay It: You can start receiving CPP as early as age 60, but it will be reduced by 0.6% for each month before your 65th birthday. Conversely, you can delay CPP payments until age 70, which will increase your monthly benefits by 0.7% for each month after your 65th birthday. Carefully weighing when to start your CPP can help you optimize the amount you receive.
- Contribute to CPP Until Age 70: You can continue working and contributing to CPP until age 70. The more you contribute, the higher your CPP benefits will be.
- Maximize Your CPP through Earnings: If you have a higher income, you may also benefit from larger CPP payments since the amount you receive is based on your average earnings during your working years.
- Use Other Retirement Income Sources
Consider using other retirement income sources that are not subject to the OAS clawback, such as:- Tax-Free Savings Accounts (TFSAs): Income from TFSAs does not count towards your net income, so withdrawals from these accounts will not affect your OAS. By strategically using TFSAs, you can reduce your reliance on taxable sources of income in retirement.
- Pension Plans: If you have access to a pension plan from an employer, this can provide a steady income stream that’s not subject to the OAS clawback.
- Consult a Financial Advisor
Since managing the OAS clawback can be complex, consulting with a financial advisor can help you devise a strategy that suits your specific needs. A financial advisor can help you plan how to manage your income, choose tax-efficient investments, and optimize your retirement benefits.
How to Protect Your CPP Benefits
Your CPP benefits are not subject to the OAS clawback, so they are a key part of your retirement income strategy. To protect and maximize your CPP benefits:
- Start Contributions Early: Begin contributing to the CPP as early as possible to increase your benefits.
- Continue Working: If you work past the age of 65, your CPP payments can increase, since they are based on your highest-earning years.
- Time Your Start Date: The earlier you start CPP, the lower your monthly payments will be. Consider waiting until age 70 to start your CPP if you can afford to defer.
1. What is the OAS clawback and how does it work?
The OAS clawback reduces your Old Age Security payments if your income exceeds a certain threshold. For every dollar above the threshold, you lose 15 cents of your OAS payments.
2. What is the income threshold for the OAS clawback?
For 2023, the income threshold is $81,761 for individuals and $131,121 for couples. If your income exceeds these amounts, the clawback begins.
3. How can I avoid the OAS clawback?
You can avoid the clawback by managing your retirement income, contributing to tax-deferred accounts like RRSPs, delaying your OAS payments, and using tax-efficient investment strategies.
4. Can I protect my CPP benefits from the OAS clawback?
Yes, CPP benefits are not subject to the OAS clawback, so they are unaffected by your income level. Optimizing your CPP by working longer or deferring your start date can help increase your benefits.
5. Should I consult a financial advisor about the OAS clawback?
Yes, a financial advisor can help you devise a strategy to minimize the OAS clawback and maximize your retirement income by tailoring your income sources to your specific financial situation.