CPP Pension Users: 2 Ways to Avoid the 15% OAS Clawback

The OAS clawback should not worry you. Investors should instead worry about not saving enough for retirement.

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The Old Age Security (OAS) program is the Government of Canada’s largest pension program. Canadians nearing retirement would have heard about the OAS program. While the Canada Pension Plan (CPP) gains significant attention from retirees, Canadians need to dissect the OAS in detail and ensure maximum payments in retirement.

The maximum OAS pension stands at $613.53 per month, or $7,362.36 per year. However, if your annual income exceeds $75,910 over the age of 65, you will be taxed 15% on your OAS payment. Further, if your annual income exceeds $123,385 on retirement, you are ineligible for OAS payouts.

So, how do you avoid this OAS clawback?

You can prepone certain capital gains and avoid the OAS clawback

If you have invested in property and are planning to sell it to liquidate the investment, you can consider selling it before the age of 65. If the capital gains on property investments are huge and you sell it after turning 65, you are unlikely to receive any OAS payments for the year.

Delay your Canada Pension Plan

The Canada Pension Plan (CPP) is another government-based pension plan. The maximum annual CPP payout for a Canadian starting this payment at the age of 65 stands at $14,109.96. You can defer your CPP payment until the age of 70.

This will not only ensure higher OAS payments but will also increase your CPP amount if withdrawals are delayed. If CPP is delayed until the age of 70, the maximum annual income stands at $20,036.14.

Build a retirement nest egg to supplement OAS payouts

If your OAS payments are subject to the clawback, it is not the end of the world. In fact, it’s a good problem to have. As seen above, only retirees with an annual income of $75,910 will be taxed on their OAS. Canadians need to ensure they have enough savings for a comfortable retirement life.

One tried-and-tested way to beat inflation and grow your capital is by investing in the equity market. Investing is a long-term play, and you can identify top-quality stocks with an expanding addressable market to build wealth.

Companies such as TransAlta Renewables (TSX:RNW) tick most boxes. It is one of the largest wind power generators in Canada. It has a well-diversified asset platform with 23 wind facilities, 13 hydroelectric facilities, and seven natural gas generation facilities.

Additionally, TransAlta also has one solar facility and one natural gas pipeline. It has close to 2,527 megawatts of owned capacity. TransAlta has operations in Canada, the United States, and Australia.

The renewable giant aims to provide investors with stable and consistent returns by focusing on contracted renewable and natural gas power facilities. These long-term contracts will ensure a steady stream of payouts and help the company sustain and increase dividend payouts.

Shares of TransAlta renewables are trading at $14.4, which is 21% below its 52-week high. This pullback has meant its dividend yield is a tasty 6.5%. It means a $10,000 investment in TransAlta will generate $650 in annual dividend payments. You can either withdraw or reinvest these payouts and benefit from the power of compounding.

As TransAlta is part of an expanding market, investors will benefit from capital gains as well. The company went public back in August 2013 and has returned 44% since then.

The Foolish takeaway

You can build a robust equity portfolio by investing in stocks such as TransAlta and secure or even accelerate your retirement. In case you reach the OAS clawback income, look at a few strategies like delaying CPP payments to reduce these taxes.

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 Aditya Raghunath has no position in any of the stocks mentioned.

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