By Paul McCoy, CIMA®, AIF®
If you’re nearing retirement, it’s possible you’re preparing to receive your Old Age Security (OAS) payments. With payments of as much as $618.45 per month, the OAS pension can be an important part of your retirement strategy.1 But did you know that you could be subject to something known as the OAS clawback? This tax burden could affect your payments and impact your income in retirement.
What Is the OAS Clawback?
The OAS clawback refers to the Old Age Security pension recovery tax. Should your net world income exceed a certain amount while receiving your pension, you will be required to pay back all or part of your OAS pension.
For 2021, the minimum income threshold is $79,845. You are responsible for paying back 15 percent of the income amount above the minimum income threshold.2 You would then be responsible for paying this amount back during the July 2022 to June 2023 recovery tax period.
As an example, say your net global income for 2021 was $100,000. Because the minimum income threshold is $79,845, you would be responsible for paying back 15 percent of the difference between the threshold and your income.
Your income ($100,000) - Income Threshold ($79,845) = $20,155
Fifteen percent of $20,155 is $3,023. This means that you would have to repay $3,023 during the recovery tax period.
How to Avoid the OAS Clawback
Depending on your unique circumstances, it may not be possible to avoid the OAS clawback. But for some individuals and couples, there are some things you can do to try to reduce or eliminate this tax burden.
Strategy #1: Income Splitting Between Spouses
The OAS recovery tax income limits refer to a single person’s income. If you are married, you and your partner may be able to split income from various sources in a way that brings your individual incomes below the threshold limit. This can be especially helpful if one partner receives more income than the other.
You may be able to transfer portions of your income to your spouse throughout the year including:
- Pensions (up to 50 percent may be transferred to a spouse)
- Registered Retirement Income Funds (RRIF)
Strategy #2: Review Your Income Sources
Remember that qualifying income can come from a variety of sources, including a job, annuities, pensions and investments. Interest from certain investments could count towards your income, and a portion of capital gains may count as well.
If you’re concerned about exceeding the income threshold, you may be able to utilize accounts like your Tax-Free Savings Account (TFSA) to shield income from the clawback. Passive income earned through assets held in your TFSA are not subject to the pension recovery tax. Savings and investments held in your TFSA are tax-free, and withdrawals made in retirement are not subject to the pension recovery tax either.
Strategy #3: Utilize Your RRSP
If you are under 71, you can continue contributing to your RRSP while receiving an OAS pension - as long as you have contribution room left or you are still employed. If you are over 71, but your spouse is not, you may make contributions to their RRSP as long as they have not reached the contribution limit.3
Making contributions to your or your spouse’s RRSP can lower your net income for the year, which can make it an effective tool in avoiding the OAS clawback.
Strategy #4: Defer Your OAS Pension
You have the option to defer your OAS payments for up to 60 months, or five years.4 The longer you wait to begin receiving your payments, the larger your payments will be. Once you hit age 70, the benefits no longer grow and there is no advantage to delaying your payments any longer. If you are between ages 65 and 70 and you are still working, you may find it beneficial to delay payments. In fact, delaying your payments may be necessary to avoid the pension recovery tax.
Whether you’re already receiving payments or you’re nearing retirement, there are things you can do this year to help reduce or avoid the OAS clawback. Work with your financial professional to review your options, as they can make recommendations based on your specific circumstances.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.