The Canada Revenue Agency (CRA) is always seeking to claw back some of the excess cash paid out to well-off Canadian retirees. If you’ve supposedly retired and are raking in OAS pension payments, you could be on the hook to pay a chunk of it back (OAS pension recovery tax) if you’re making more than $79,054 for the tax year 2020.
As a retiree, having enough retirement income to trigger such a clawback may seem like a nice problem to have!
And while it very well may be, it’s still a problem that can be easily alleviated (or at least partially depending on your unique situation) through a more optimal allocation of funds across your investment accounts such as the Tax-Free Savings Account (TFSA).
Now, as a retiree, I’m going to make a few assumptions that I believe are appropriate to make.
First, you’re a retiree who’s collecting OAS payments and are making enough income to put you alarmingly close to or above the $79,000 watermark.
Second, you’re not investing a substantial portion of your wealth across higher-growth securities that would be better suited to a younger investor who can afford to take on more risks to get potentially more reward. That means you’re not expecting to bag a multi-bagger with high capital gains potential.
Third, your goal is not just to maximize income in your investments by chasing high yielders but to find the optimal balance of income, growth, and safety. So, you’ll have a sustainable (but still generous) dividend payout that will grow at a real rate over time.
Fourth, you’ve saved up a sizeable nest egg for yourself that’s large enough to warrant excessive cash piles that, as of 2020, are unable to fit within your TFSA. And you’ve amassed a TFSA of around $300,000 from regular contributions and systematic investment in equities over the last 11 years since the TFSA’s inception.
With these assumptions in mind, the first (and probably most obvious) move is to place all of your highest-yielding securities within your TFSA to maximize your non-taxable income. Consider BMO High Dividend Equity Covered Call ETF (TSX: ZWC), a nearly 7%-yielding basket of high-dividend-paying stocks that have been hand-selected for the size of their yields, the reliability of the payouts, and even the quality of forward-looking growth.
If you rely on such a high-yield investment for your monthly income, it’s in your best interest to keep it inside your TFSA if your cumulative income (both investment income and income from elsewhere) puts you at risk of a clawback.
With a $300,000 invested in a one-stop-shop ETF like ZWC, the ETF’s 7% yield would give you $21,000 in annual income, and if you’re making a fair chunk of change with your retirement side gig, it’s in your best interest to keep that $300,000 in your TFSA to minimize your taxable income.
And with the excess cash that you can’t put in your TFSA legally?
Consider sacrificing a bit of yield for longer-term growth. Now, I don’t mean invest in non-dividend-paying growth stocks. Rather, I’d urge you to look to investments that will either keep you below the clawback mark or stay comfortably below (to account for dividend hikes down the road) by settling for a lower yielder that can offer you higher capital gains (won’t be taxed until you sell) and dividend growth (higher income in the future when you may not be raking it in from your side gigs).
Foolish takeaway
For a retiree, you’re looking for big (and safe) income, but it’s also appropriate to sacrifice a bit of income for growth with your taxable accounts if you’re at risk of a clawback. Through proper allocation with your TFSA, such clawbacks may be avoidable.
Stay hungry. Stay Foolish.
