Retirement years can be some of the best years of your life. If you are healthy, aren’t tied down by responsibilities, and have enough retirement income or savings to get by, you can truly enjoy your golden years. You can travel, spend time with friends and family, pick up a hobby, and do the things you never had time for when you were working.
But that’s highly dependent upon how well funded your retirement is. You should have enough funds to easily get by, but if your taxable income breaches the $79,054 threshold, you will be subjected to a 15% clawback on the amount exceeding this threshold. There are several ways to get around this problem. Here are three of them.
Withdraw from your RRSP before the OAS pension starts
If you take out your RRSP before you turn 65, you will lose the retirement account’s tax-deferral benefit. But you will also eliminate a major portion of your taxable income for future years, which might have you fall below the income threshold, and you will be protected against the OAS clawbacks. But it’s usually not worth the extra tax you will need to pay.
However, if you defer taking OAS payments till you are 70 and start using your RRSP funds earlier, you might be able to strike the right balance.
Defer pension payment
Both OAS and CPP can be deferred till you are 70, and it’s highly recommended that you do that, especially if you can work till the age of 70. This will allow you to maximize the pension amounts you will receive. It is best for individuals that are expected to earn a high income (above the OAS clawback threshold) between the ages of 65 and 70.
Rely on your TFSA
The TFSA can be a great way to regulate your taxable income in your retirement years. For years where your taxable income is expected to grow over the OAS clawback minimum, you can lean more heavily on your TFSA. You can have the same amount of money to spend without increasing your taxable income.
One way to beef up your TFSA is investing in a Dividend Aristocrat like Exchange Income Fund (TSX:EIF). The company has raised its dividends for nine consecutive years and didn’t slash its dividends, even through some of the roughest quarters it experienced in 2020. Its association with the airline industry is the major reason why the stock lost over 68% of its valuation in March.
It’s not a powerful growth stock, but its yield and status as a Dividend Aristocrat can make it a great addition to your TFSA. If you invest a hefty amount in the company now and choose to reinvest the dividends in a couple of decades, you might have enough shares in the company to start a sizeable, dividend-based passive income.
When you try to get around the OAS clawback issue in your retirement years, always run a cost-benefit analysis. If the strategy you are opting for is costing you more in the long term, then it might not be worth it. In any case, deferring to receive your OAS payments is a smart idea, because even if your savings are depleted, the OAS and CPP will remain with you.
Speaking of OAS clawback...
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Fool contributor Adam Othman has no position in any of the stocks mentioned.