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CPP Pension Users: 3 Smart Ways to Avoid the 15% OAS Clawback

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The Canada Revenue Agency (CRA) is encouraging taxpayers to prepare for the 2021 tax season. Since there’s no extension announcement yet, the tax filing and tax payment deadlines are on April 30, 2021. For Canada Pension Plan (CPP) pensioners, it’s another reckoning period with the 15% Old Age Security (OAS) clawback. No retiree wants a reduction in OAS benefits, as much as possible. You’ll trigger the infamous recovery tax if your income in 2020 exceeds the $79,054 threshold.

As a reminder, your OAS benefits reduce by 15 cents for every $1 above the minimum income recovery threshold. If your income reaches the maximum ($128,149), you get zero benefits. The recovery tax period that corresponds to the thresholds mentioned here is July 2021 to June 2022.

However, CPP users shouldn’t despair. There are three smart ways to avoid the 15% OAS clawback. Learn them and be in an excellent position to minimize the tax bite.

1. Defer OAS

Like the CPP, you can elect to defer your OAS payments up to five years. If you start the payments at age 70 instead of 65, your monthly benefits increase by 36%, permanently. Also, your OAS clawback threshold will rise over five years because of inflation. Hence, it will require more income to exceed it.

2. Split income with your spouse

The CRA allows the splitting of pensions between spouses. Share with or give your spouse money from CPP pension, Registered Retirement Income Funds (RRIF), and annuity payments. In such a case, it can lower individual income for either spouse to limit or avoid the dreaded OAS clawback.

3. Withdraw RRSP fund early

Withdrawing funds from your Registered Retirement Savings Plan (RRSP) before age 65 is a savvy move, mostly if done during periods when you belong to a low-income tax bracket before retirement.

Furthermore, if the available RRSP fund is lower, later on, you maximize the OAS benefit. You can then transfer or re-invest the money withdrawn from your RRSP to a Tax-Free Savings Account (TFSA). The CRA can’t touch or tax your income anymore.

Top pick for 2021

The CRA announced the TFSA contribution limit for 2021. If you’re an account holder, you have an additional $6,000 contribution. It could be more if there’s a carry-over room from 2020. A dividend heavyweight like BCE (TSX:BCE)(NYSE:BCE) can deliver higher tax-free income.

COVID-19 caused massive disruptions in many sectors. However, BCE stands tall because telecommunications and Internet services are essential services during the crisis. As an investment option, this telco stock is recession-resistant. Furthermore, the dividend offer is a fantastic 6%.

Risk-averse income investors should have no qualms owning BCE shares. The $59.13 billion telecom behemoth’s operating cash flow streams are resilient and would be for decades. I agree with the assessments of some analysts that the revenue hit due to coronavirus is fleeting.

The stock is likely to break out in the post-pandemic era. The share price could soar from $54.36 to $69 (+27%) within a year based on forecasts. Seize the moment and add a defensive asset in your TFSA.

No trouble with the CRA

The tactics above will not get you in trouble with the CRA. Nothing is irregular about the three proven ways. The 15% OAS clawback will no longer be a thorn but an easy picking for CPP pensioners.

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