You work your whole life and eventually retire at age 65.
Then because you worked so hard, the government takes back your pension that you were promised. It hardly seems fair. How can you stop them from doing so. It may take a little planning.
The Old Age Security (OAS) program includes a basic pension that goes to almost all people 65 and is indexed for inflation every January, April, July and October. The OAS clawback occurs if your net individual income is above a set threshold (currently $62144), your OAS pension will be reduced. This figure is also adjusted each year for inflation. For every dollar ($1.00) of income above the threshold, the amount of basic OAS pension reduces by 15 cents. In my conversations with retirees, many are concerned about the OAS clawback.
Here are some simple strategies to help you minimize the clawback.
1. Defer RRSP income. Eventually, RRSPs must be converted to income. In fact, the latest you can defer an RRSP is December 31 in the year in which you turn 69 and then take the minimum withdrawal each year to minimize your net income.
2. If you have a younger spouse, use the younger spouses age for RRIF planning to calculate the minimum RRIF income. It will lower your income.
3. Tax efficient income on non-RRSP investments. When it comes to investment income from non-registered investments, different types of income are taxed differently. Interest income from Guaranteed Income Certificates (GICs) and term deposits are taxed at a higher rate. However, dividend income and capital gains enjoy a much lower tax rate. Capital gains can be triggered sometimes when you decide, not annually like interest income.
4. Use Part of your Non-Registered Funds to Purchase an Annuity to give you a stream of income. From a tax perspective, only a portion of each payment is taxable because a portion of each payment is considered a return of capital and is therefore tax-free
5. If you have a spouse and you are able to split your income with your spouse, you may be able to reduce your net income. Some examples include CPP splitting, investment income and payments from corporations.
6. Final RRSP contribution. Up until and including age 69 if you have unused RRSP deduction room, make a final RRSP contribution. Check to see if you are receiving OAS clawed back and plan to take it back for yourself.