Retirement planning can feel like a balancing act, especially when faced with the OAS clawback. Officially known as the Old Age Security (OAS) Recovery Tax, the clawback reduces OAS payments if your income exceeds a certain threshold. For the latest tax year, that threshold was set at $90,977. Once your income surpasses this limit, the government deducts $0.15 from your OAS for every extra dollar earned, and at higher income levels, this can eliminate your OAS benefits altogether.
Understanding how your Canada Pension Plan (CPP) benefits interact with the OAS clawback is key to maintaining financial security in retirement. Here’s a look at the clawback and some strategies to help protect your benefits.
clawback
The OAS clawback begins when your net income exceeds the annual threshold, currently set at $90,977. This recovery tax is applied to your total income, which includes Canada Pension Plan (CPP) payments, employment income, pension income, and even withdrawals from your RRIF. For instance, if you earn $100,000 in a year, $9,023 of that income exceeds the limit, resulting in a clawback of $1,353 (9,023 × 15%).
If your income hits $149,000 or more, the entire OAS benefit—around $7,040 annually—will be clawed back. The clawback is assessed through your tax return and will be reflected in your OAS payments starting the following July.
Delay
One effective way to reduce your net income during the early years of retirement is by delaying your CPP payments until age 70. By postponing CPP benefits past age 65, you can increase your monthly payouts by 8.4% per year. This strategy not only helps lower your income initially, reducing the likelihood of a clawback, but it also enhances your long-term financial security with higher CPP benefits later on.
Reduce Income
If you’re still working or receiving other pension incomes, reducing your income can make a significant difference in avoiding the OAS clawback. Cutting back on work hours or opting for smaller income distributions could help keep your total income below the threshold. Every dollar counts when it comes to managing taxable income.
Estimated OAS Clawback
| Income Range (CAD) | Clawback Rate | OAS Loss |
|---|---|---|
| $90,977–$100,000 | 15% | $1,350 |
| $100,001–$110,000 | 15% | $2,850 |
| $130,000–$140,000 | 15% | $7,350 |
| $149,000+ | Full Clawback | $7,040 |
Income Splitting
If your spouse earns significantly less, income splitting can help balance your household’s overall income. By allocating part of your retirement income to your spouse, you can reduce your taxable income and potentially keep it below the clawback threshold.
Leverage TFSAs
Tax-Free Savings Accounts (TFSAs) are a powerful tool for retirement planning. Unlike RRSP withdrawals, TFSA withdrawals are not counted as taxable income. By drawing funds from a TFSA instead of taxable sources, you can manage income fluctuations and avoid triggering the OAS clawback.
Claim Deductions
Maximizing eligible tax deductions is another effective strategy to reduce your taxable income. For example, claiming charitable donations, medical expenses, or investment losses can help. Medical expenses over 3% of your net income or using unused RRSP contribution room can significantly lower your taxable income, ensuring that more of your OAS benefits remain intact.
Use RRSPs
Contributing to a Registered Retirement Savings Plan (RRSP) is another smart move. RRSP contributions are tax-deductible, which reduces your taxable income and minimizes the OAS clawback. Additionally, RRSPs defer taxes until withdrawal, allowing your investments to grow in a tax-sheltered environment.
Conclusion
Managing your retirement income requires careful strategy. From delaying CPP payments and maximizing deductions to using RRSPs and TFSAs, there are several ways to minimize the OAS clawback. The key is proactive planning and regular consultation with a financial advisor to tailor these strategies to your specific needs. Retirement should be a time to enjoy life—smart financial planning can help keep the stress away.
FAQs
What is the OAS clawback?
The OAS clawback is a reduction in your Old Age Security (OAS) payments if your income exceeds the annual threshold of $90,977.
How is the clawback calculated?
The clawback is calculated by deducting $0.15 for every dollar your income exceeds the $90,977 limit.
Can delaying CPP reduce the clawback?
Yes, by delaying your CPP payments, you reduce your income during the early retirement years, which can help lower the risk of triggering the OAS clawback.
Do RRSP contributions help with the clawback?
Yes, contributing to an RRSP lowers your taxable income, which can reduce the risk of having your OAS payments reduced by the clawback.
Are TFSA withdrawals taxable?
No, TFSA withdrawals are not taxable and do not count as income, so they do not impact the OAS clawback.