The Old Age Security (OAS) is the pillar of the retirement income system in Canada that is available to qualified seniors ages 65 and older. The only thing recipients find terrible is the tax component, or the 15% OAS clawback.
For the income year 2020, if your income exceeds the minimum income recovery threshold of $79,054, you will trigger the OAS clawback. The tax due is 15% of the excess amount. However, should your income hit the maximum income recovery threshold or $128,137, you get zero OAS benefit.
Dodge this recovery tax. It’s easier than you think. Once you minimize the effects, you lessen the stress of retirement life.
Maximize your TFSA first
The sound advice given every time concern is raised about the 15% clawback is to go tax-free. Your Tax-Free Savings Account (TFSA) should cure your OAS tax anxiety. Whatever income you derive from a dividend-paying stock like A&W (TSX:AW.UN), for instance, is tax-free.
The dividend of this $429.53 million revenue royalty income fund just crossed the 7% yield territory. If the available contribution room in your TFSA is $20,000, the potential tax-free earning is $1,400.
A&W is the pioneer in the quick-service restaurant industry. This hamburger chain came in the U.S. during the 80s then grew aggressively in the 90s. In Western Canada, A&W’s expansion was via free-standing restaurants. By 1996, the royalty fund was selling corporate-owned restaurants and offering franchise licences.
Over the last four years, the top and bottom lines are trending upward. Last year, revenue and profit increased by 8.8% and 6.5%, respectively. At present, the fund owns 76.4% of A&W trademarks. The restaurants in the royalty pool pay the trademark owner 3% of reported gross sales.
Withdraw from the RRSP before 65
Retirement requires meticulous tax planning. If you are contributing to the Registered Retirement Savings Plan (RRSP), consider withdrawing the funds before age 65. This option is useful if you have periods with low taxable income before retirement.
By withdrawing early, the funds available on retirement date might be lower, and therefore, you maximize the OAS benefit due to you. You can move the funds withdrawn from your RRSP to the TFSA for tax-free earnings again.
Sienna (TSX:SIA) is an $891 million company that provides senior housing and long-term care (LTC) services in Canada. This stock is among the highest dividend payers in the medical care facilities industry. Currently, the yield is an equally generous 7.04%. Your capital can double in a little over 10 years.
Sienna is well known in the senior living industry for its high-quality and balanced portfolio of long-term care and retirement residences. The demand is ever increasing, as shown by the 98.2% occupancy rate in its LTC portfolio. Also, the waiting list for each of the residences is long.
As the sector evolves due to the aging demographic in Canada, Sienna expects future demand to exceed supply. The company is sitting on a long-term growth potential, which should drive the stock higher in the coming years.
Do it right
Stop upsetting yourself about the 15% OAS clawback. The solutions to dodge the tax will work if done correctly.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.