Shivansh Verma
Planning your retirement income is vital, especially if you’re relying on Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. The OAS clawback, officially known as the OAS Recovery Tax, is a reduction in your OAS benefits if your income exceeds a government-set threshold. For the current tax year, individuals with net income over $90,977 will see their OAS benefits reduced by $0.15 for every dollar above this limit.
At higher income levels, you could lose your entire OAS benefit—up to $7,040 annually if your income exceeds $149,000. Understanding how the OAS clawback works and employing strategies to minimize or avoid it can significantly impact your financial security in retirement. This guide will explain the OAS clawback and share actionable tips to help you protect your benefits.
What Is the OAS Clawback?
The OAS clawback is a mechanism where your OAS benefits are reduced if your income exceeds a specific threshold, set annually by the Canadian government. This reduction ensures that benefits are more targeted toward those with lower to moderate incomes.
- Threshold: For 2024, the clawback begins if your net income surpasses $90,977.
- Clawback Rate: $0.15 is deducted from your OAS benefits for every dollar of income above the threshold.
- Maximum Clawback: At an income level of $149,000 or more, you will lose your entire OAS benefit.
Example: If your income is $92,000, which is $1,023 above the threshold, you will lose $153.45 ($1,023 x 0.15) of your OAS benefits.
Since CPP payments count toward your total income, they can contribute to triggering the clawback. For instance, combining CPP payments with other income sources like pensions, employment earnings, or investment returns can push your income above the threshold
Strategies to Minimize or Avoid the OAS Clawback
1. Delay Taking CPP Benefits
One effective way to avoid the clawback is to delay receiving your CPP benefits. CPP can be deferred until age 70, while OAS typically starts at age 65. Delaying CPP benefits reduces your income in the early years of retirement, potentially keeping you below the clawback threshold.
Additionally, delaying CPP increases your payments by 8.4% per year after age 65, offering a higher monthly benefit when you eventually start collecting.
2. Reduce Employment or Pension Income
If you’re still working or receiving pension income in retirement, consider scaling back your work hours or opting for a smaller pension payout. Lowering your overall income can help you stay below the clawback threshold, preserving your full OAS benefits.
3. Maximize Tax Deductions
Tax deductions can play a crucial role in reducing your taxable income:
- Medical Expenses: Claim eligible medical costs to reduce your net income.
- Charitable Donations: Deduct donations to registered charities.
- Other Deductions: Explore additional deductions, such as union dues or child care expenses, if applicable.
Properly documenting and claiming these deductions can significantly lower your taxable income.
4. Contribute to an RRSP
Registered Retirement Savings Plan (RRSP) contributions are tax-deductible, allowing you to reduce your taxable income during your working years or even in retirement. By contributing to an RRSP, you can bring your income below the clawback threshold while benefiting from tax-deferred growth.
Use Tax-Free Accounts and Income Splitting
5. Withdraw from a TFSA
Tax-Free Savings Account (TFSA) withdrawals are not considered taxable income and don’t count toward the clawback calculation. By relying on a TFSA for withdrawals instead of taxable accounts, you can manage your income effectively to stay below the OAS clawback limit.
6. Spousal Income Splitting
If you’re married or in a common-law relationship, you can split certain types of income, such as pension income, with your spouse. This strategy can reduce the higher-earning spouse’s taxable income and help avoid triggering the clawback. Spousal income splitting works particularly well if one partner has significantly lower income.
How Income Affects the OAS Clawback
Here’s an illustration of the OAS clawback at various income levels:
| Income Level (CAD) | Clawback Rate (15%) | Approximate OAS Clawback |
|---|---|---|
| $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 Tips for Protecting Your Benefits
- Work with a Financial Advisor: Personalized advice can help you implement the most effective strategies based on your unique financial situation.
- Plan Withdrawals Strategically: Balance withdrawals from taxable accounts (like RRSPs) and non-taxable accounts (like TFSAs) to manage your income effectively.
- Monitor Your Income: Regularly review your income sources and adjust as needed to stay below the clawback threshold.
Conclusion
The OAS clawback can reduce the financial security of retirees, but careful planning can help you retain your benefits. Strategies like delaying CPP, contributing to an RRSP, maximizing deductions, using TFSA withdrawals, and income splitting can all play a role in minimizing or avoiding the clawback.
By staying proactive and consulting with a financial advisor, you can manage your retirement income effectively, preserving your OAS benefits and ensuring greater financial stability during your golden years.
1. What is the OAS clawback threshold for 2024?
The threshold for 2024 is $90,977. Any income above this amount triggers a clawback of $0.15 for every additional dollar.
2. Can I avoid the clawback entirely?
Yes, by managing your income through strategies like delaying CPP, using TFSA withdrawals, or spousal income splitting, you can potentially avoid the clawback altogether.
3. Does CPP income count toward the clawback?
Yes, CPP payments are included in your taxable income and can contribute to exceeding the clawback threshold.
4. Are TFSA withdrawals taxable?
No, TFSA withdrawals are tax-free and do not count toward your income for OAS clawback purposes.
