Earlier this month, I’d discussed some of the ways Canadians can retire in comfort with just Canada Pension Plan (CPP) and Old Age Security (OAS) payments. Some ways retirees can grant themselves some relief is through downsizing or building a steady income stream with a Tax-Free Savings Account (TFSA).
The Canadian federal government is taking steps to give its citizens relief, as the cost of living continues to increase. Canadians are burdened by high levels of debt, and this will make it very challenging for some to live through a relatively stress-free retirement. One way the government is providing tax relief is through the Basic Personal Amount (BPA). Canadians will be able to claim a BPA of $15,000 by 2023.
Today, I want to focus on the Old Age Security (OAS) pension, which is a taxable monthly payment to eligible seniors who are 65 or older. As of 2020, the maximum monthly basic OAS payment is $613.53 for the first quarter of this calendar year. When a seniors’ net income exceeds the threshold set by the government, the OAS paid is subject to a claw back. For this year, the Recovery Tax is triggered at a net income of $79,054 or higher. Let’s discuss some of the ways a retiree can sidestep the clawback.
The tactic of income splitting has come under fire in recent years, with some Canadians expressing concern that the federal government could take steps to eliminate this tax strategy. Both major parties have stayed far away from any tweaks that could negatively impact taxpayers in this regard.
Retirees can split their pension and other income such as their Registered Retirement Income Funds (RRIF), annuity payments, and CPP between spouses. This allows Canadians to lower their individual income for either spouse. Ideally, this will help to limit or avoid OAS clawbacks altogether.
Early RRSP withdrawal
In most cases, an early RRSP withdrawal is inadvisable. Those who want to avoid the OAS claw back can consider withdrawing from their RRSP funds before the age of 65 if they are passing through periods with low taxable income. As many Fools know, RRSPs are tax-deferred, so taxes will be due at withdrawal.
Canadians may be able to maximize the OAS benefit they qualify for by reducing their RRSP funds. As a bonus, they can use those RRSP funds to re-invest in another vehicle, like the TFSA. That way we can avoid the clawback and feast on tax-free growth and/or income. Retirees can pour those funds in a TFSA and buy a reliable income-generating equity like Fortis or Hydro One.
Defer OAS pension
Seniors also have the option to defer their OAS pension for up to five years when they become eligible. This deferral can also work to make seniors eligible for a higher monthly pension with an increase up to 36% by age 70. Seniors who are guaranteed to pass the threshold for the clawback should almost certainly consider this strategy.
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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 Ambrose O'Callaghan owns shares of FORTIS INC and HYDRO ONE LIMITED.