Canada Pension Plan (CPP) users don’t have to worry about a claw back like in Old Age Security (OAS). However, a pensioner will have to contend with the 15% OAS claw back when the second government pension payments start at age 65.
If you’re receiving OAS and your net income in the income year 2020 hits $79,054, you’re in the claw back zone. For every dollar above this minimum income recovery threshold, your OAS benefit reduces by 15 cents.
The Canada Revenue Agency (CRA) will claw back 100% of your OAS if your net income in 2020 reaches or exceeds the maximum income recovery threshold of $128,129. However, the battle against the recovery tax is not lost. There are three ways to avoid the 15% OAS claw back.
1. Take the CPP/OAS delay option
Canadian seniors defer OAS pension for up to five years from age 65 to receive 36% more payments. You can use this strategy if your income level between ages 65 and 70 is precariously close to OAS clawback’s income threshold. Defer your CPP too until 70 to receive a permanent increase of 42%.
2. Split the pension
The CRA allows pension splitting between spouses. This approach is the shrewdest because it enables a higher-income spouse to lower the tax bill by transferring up to 50% of eligible pension income to their spouse. A reduction in pension income lowers if not eliminates the claw back.
3. Use TFSA to the hilt
The CRA won’t be at your back if you prioritize your Tax-Free Savings Account (TFSA). Income, profits, and withdrawals from this unique investment vehicle for Canadians are tax-free. It’s an excellent tool to minimize one’s taxable income and, inversely, to maximize your OAS benefit.
Utilize your TFSA to hilt to boost personal income. Cash, GICs, bonds, mutual funds, exchange-traded funds (ETFs), and stocks are among the eligible or qualified investments. Many users prefer dividends stocks because income streams are recurring. Accumulating retirement savings is also faster.
The Tax-Free Savings Account (TFSA) is a tax-advantaged savings vehicle like no other. If you have a buy-and-hold investment like the Royal Bank of Canada (TSX:RY)(NYSE:RY) or RBC, better keep it in the account. The CRA can’t get in the way of your long-term goals unless you over-contribute or do frequent trading to generate taxable business income.
RBC is an excellent holding if you’re building wealth or saving for retirement. The largest bank in Canada is not only a provider of selected global financial services but a reliable source of tax-free income as well. Young and old investors alike should be happy to know that the bank stock has returned more than $35 billion in dividends over the last ten years.
The dividend track record of this $137.58 billion banking titan is 15 decades. With its 4.47% dividend offer today, a $150,000 investment will deliver a lifetime tax-exempt monthly income of $558.75 in your TFSA. Furthermore, your account balance will compound to almost $450,000 in 25 years.
No more thorn
The 15% OAS clawback is inevitable but not avoidable. CPP users can be a step ahead of the CRA by adopting the three crafty ways above. All are legal and permitted by the tax agency.
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