The Old Age Security (OAS) clawback, also referred to as the OAS Recovery Tax, poses a substantial challenge for retirees with higher incomes. When annual income surpasses a specific government-determined limit, OAS payments are gradually reduced. For the latest tax year, any income above $90,977 triggers a reduction of $0.15 for every dollar earned beyond this threshold.
Retirees with a total annual income of $149,000 or more may lose their entire OAS entitlement, which can total up to $7,040 annually. Grasping the mechanics of the clawback, along with the role of Canada Pension Plan (CPP) benefits in determining income, is essential for sound retirement planning.
What is the OAS Clawback?
The OAS clawback is a tax mechanism aimed at reducing OAS benefits for individuals whose net income exceeds a specific threshold. Calculated annually, the clawback is based on the net income reported on a retiree’s tax return. Any reduction in OAS payments begins in July of the following year.
Since CPP payments count toward total net income, they can increase the likelihood of triggering the clawback. For instance, if a retiree earns $80,000 from various sources and receives an additional $20,000 in CPP benefits, their total income rises to $100,000, surpassing the clawback threshold and leading to partial OAS payment reductions.
Practical Examples of the OAS Clawback Impact
The following table illustrates how varying income levels can affect the OAS clawback:
| Income Level (CAD) | Clawback Rate (15%) | Estimated OAS Clawback Amount |
|---|---|---|
| $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 | Complete OAS Reduction |
Strategies to Minimize or Avoid the OAS Clawback
1. Delay CPP Benefits
One effective strategy to lower net income during retirement is to delay CPP benefits. Although OAS payments usually begin at age 65, CPP benefits can be deferred until age 70. This postponement not only reduces taxable income during earlier retirement years but also increases CPP payouts by 8.4% annually, providing higher benefits in the future.
2. Reduce Employment or Pension Income
If you are working or receiving pension income in your 60s, consider reducing work hours or opting for smaller pension distributions. By keeping your total income below the clawback threshold, you can safeguard a larger portion of your OAS benefits.
3. Maximize Tax Deductions
Taking full advantage of available tax deductions can help reduce net income. Common deductible expenses include:
- Charitable donations
- Medical expenses exceeding 3% of net income
- Other eligible costs
Properly documenting and claiming these deductions lowers taxable income, potentially mitigating the clawback.
4. Contribute to a Registered Retirement Savings Plan (RRSP)
Contributions to an RRSP are tax-deductible, making it an excellent tool to reduce net income. By contributing within allowable limits, retirees can lower their taxable income below the clawback threshold while deferring taxes on those contributions until they are withdrawn.
Additional Tools to Manage Retirement Income
1. Use Spousal Income Splitting
For married or common-law couples, spousal income splitting is a valuable strategy. By allocating a portion of retirement income to a lower-income spouse, retirees can reduce their net taxable income and avoid crossing the clawback threshold.
2. Withdraw from a Tax-Free Savings Account (TFSA)
Funds withdrawn from a TFSA are not classified as taxable income. This makes TFSAs an ideal source for retirement withdrawals when trying to stay under the clawback limit. Unlike RRSP withdrawals, TFSA withdrawals do not affect OAS benefits.
Why Proper Planning is Crucial
The OAS clawback can have a significant impact on retirement income, especially for higher earners. However, implementing proactive strategies such as delaying CPP benefits, reducing employment or pension income, maximizing tax deductions, contributing to an RRSP, and leveraging income-splitting methods can help retirees preserve their OAS payments.
Financial advisors play a pivotal role in tailoring these strategies to individual circumstances. By taking a personalized approach, retirees can optimize their retirement income while retaining as much of their Old Age Security benefits as possible.
FAQs
What is the OAS clawback threshold for 2024?
The income threshold for the OAS clawback in 2024 is $90,977, meaning any net income above this level will trigger a reduction in OAS benefits.
How much OAS can I lose due to the clawback?
The clawback reduces OAS payments by $0.15 for every dollar above the income threshold. Retirees earning $149,000 or more may lose their entire OAS entitlement, which amounts to approximately $7,040 annually.
Does CPP income contribute to the OAS clawback?
Yes, CPP benefits are included in your net income and can increase the likelihood of exceeding the clawback threshold.
