The Motley Fool

These 3 Smart Ploys Won’t Land You in OAS Clawback Territory

Image source: Getty Images

The Old Age Security (OAS) clawback territory is not the place to be for retirees. If you land there, you’ll be paying an additional 15% tax, thereby reducing the OAS payment due to you. So how will you fall into the taxable territory?

For the recovery tax period between July 2020 and June 2021, the minimum income recovery threshold is $77.580. You will trigger the OAS clawback if your income in 2019 exceeds the threshold. The maximum income recovery threshold is $126,058. If your income exceeds the maximum, your OAS benefit payment will be reduced to zero.

Let’s say your income in 2019 is $90,000. Your repayment would be 15% of the difference between $90,000 and $77,580. Hence, for reference purposes, the clawback is $1,863 ($12,520 X 0.15) or $155.25 monthly deduction.

Retirees dread the OAS clawback. However, there are smart ploys to minimize the effect of the notorious recovery tax. If you play it right, you can avoid entering the OAS clawback territory.

Revisit your income sources

Retirees should be mindful of their investment income. Usually, when a substantial portion of your income is taxable, it bumps up your overall income to the set income threshold. Income derived from non-registered investments is fully taxed. The same thing goes for GICs, dividends, and savings.

Prioritize tax-free accounts

Your Tax-Free Savings Account (TFSA) is the best weapon against the OAS clawback. Assuming you want to invest in a high-yielding real estate investment trust like Crombie (TSX:CRR.UN). You can own shares of this $2.38 billion for $15.06 per share and partake of the generous 5.63% dividend.

An investment of $25,000 in Crombie will reward you $1,407.50. If you withdraw the principal plus interest ($26,407.50) from your TFSA, the entire amount is tax free. Other equities that pay higher dividends and are listed on the TSX are acceptable investments in the TFSA.

Crombie is one of the leading national retail property landlords in Canada. The main thrust of this REIT is to own, operate, and develop a portfolio of high-quality rental properties. The focus is grocery- and drug store-anchored shopping centres, freestanding stores, and mixed-use developments.

Most of the locations are in the country’s top urban and suburban markets. At present, Crombie’s portfolio consists of 287 commercial assets, and the total value of the assets is around $4.8 billion. Crombie also has a growing development pipeline that you will soon see in Canada’s fastest-growing metropolitan areas.

Split the income

Married individuals have one more leeway to avoid or minimize the impact of the OAS clawback. In case there’s no way to prevent your net income from going beyond the income threshold, split the income with your spouse.

This strategy is proven to lower the individual income of either spouse. By eliminating the OAS clawback, you keep whole your OAS benefit.

Get smart

There are other strategies to counter the OAS clawback that could work for you. However, the three ploys are the simplest and less cumbersome approaches to deal with the clawback. Get smart and don’t be among the 5% of seniors who receive reduced OAS payments.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.

Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

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 Christopher Liew has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.