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CPP Pensioners: 3 Ways to Avoid the OAS Clawback

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The OAS clawback is the bane of many a Canadian retiree.

The clawback takes a 15% tax on income in excess of $79,054, and it can really take a bite out of your retirement benefits.

Fortunately, there are ways to combat it. As you’re about to see, there are legal ways to reduce the investment income that counts as taxable income toward OAS recovery tax calculations. In addition to the classic method of lowering taxable income by holding your investments in RRSPs and TFSAs, there’s a third approach you can use that most investors don’t know about — a method that works, even if all your registered accounts are maxed out. First, though, let’s take a close look at the most obvious method for reducing your OAS clawback.

Keep stocks in RRSPs

As long as you’re under 71 years old, you can keep adding to your RRSP and getting a tax deduction on the proceeds you contribute. Capital gains or dividends you realize inside your RRSP don’t count toward taxable income. This is a huge benefit if you hold dividend stocks like Enbridge. Enbridge presently has a 6% yield, which means you get $6,000 in annual cash payouts on every $100,000 worth of stock you hold. That’s enough to push your income above the OAS income recovery threshold if you earn $73,000 or more, so holding such shares in an RRSP may spare you having to pay the recovery tax.

Max out your TFSA

Capital gains and dividends earned in a TFSA are not considered taxable income, so it goes without saying that you should keep as much of your investments as possible in a TFSA. This is largely the same reason you want to keep investments in an RRSP, but TFSAs come with the added bonus of letting you withdraw funds whenever you want without a tax penalty.

Buy and hold long term

A final way to avoid the OAS clawback is to buy and hold your investments for the long term.

Even outside a registered account, you pay no capital gains tax if you don’t sell your shares. In such a situation, only dividends are taxed. Of course, if you never sell stock, you can’t enjoy the proceeds, but there are plenty of stocks that can generate a nice income supplement with dividends alone.

Here, again, Enbridge is a great example. With its 6% yield, all you’d need to invest in it is $130,000 to get $7,800 a year in annual income — more than the maximum annual OAS benefit! That’s a huge boost to your income, and it can be achieved without ever having to sell stock. Of course, if you hold ENB shares outside an RRSP or TFSA, then the dividends will increase your taxable income. Still, no capital gains means no capital gains tax, so long-term dividend stocks are great options for after your RRSP and TFSA have been maxed out.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

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