As retirement approaches, understanding how to maximize your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits becomes crucial.
One significant concern for retirees is the OAS clawback, a recovery tax that reduces OAS payments for individuals with net incomes exceeding a certain threshold.
For 2025, this threshold is set at $90,997. To help you retain more of your benefits, here are seven effective strategies:
Income Splitting with Your Spouse
If you’re married or in a common-law partnership, income splitting can be an effective way to reduce your taxable income.
By allocating up to 50% of eligible pension income to your lower-earning spouse, you can decrease your individual net income, potentially keeping it below the OAS clawback threshold.
Eligible incomes for splitting include Registered Retirement Income Fund (RRIF) withdrawals and annuity payments.
Maximizing Tax-Free Savings Accounts (TFSAs)
Contributing to a TFSA allows your investments to grow tax-free. Since withdrawals from a TFSA are not considered taxable income, they won’t affect your net income for OAS purposes.
Shifting investments into a TFSA before turning 65 can help minimize taxable income during retirement.
Strategic Registered Retirement Savings Plan (RRSP) Contributions
RRSP contributions lower your taxable income during your working years, enabling you to save more and potentially avoid the clawback later. It’s important to note that the last day to contribute to an RRSP is December 31 of the year you turn 71.
Since withdrawals from RRSPs are fully taxable, consider making strategic withdrawals in lower-income years to manage your taxable income effectively.
Deferring OAS and CPP Benefits
Delaying your OAS and CPP benefits can increase your monthly payments and delay clawback exposure. For OAS, benefits increase by 0.6% for every month you delay after 65, up to 36% at age 70. Similarly, deferring CPP increases payments by 0.7% per month after age 65, up to 42% at age 70.
Optimizing Investment Strategies
Different types of investment income are taxed differently. To reduce taxable income, prioritize tax-efficient investments. Dividends and capital gains are taxed more favorably than interest income.
Reallocating investments into mutual funds that convert income into capital gains or focusing on dividend-yielding stocks instead of term deposits or Guaranteed Investment Certificates (GICs) can be beneficial.
Utilizing Charitable Donations
Making charitable donations can provide tax credits that reduce your taxable income. While not directly avoiding the clawback, these donations can lower your net income, potentially decreasing the OAS recovery tax.
| Strategy | Benefit | Considerations | Implementation Timeline | Potential Impact |
|---|---|---|---|---|
| Income Splitting | Reduces individual taxable income | Requires eligible pension income and a lower-earning spouse | Upon retirement | High |
| TFSA Contributions | Provides tax-free growth and withdrawals | Annual contribution limits apply | Before age 65 | High |
| RRSP Contributions | Lowers taxable income during working years | Withdrawals are taxable; must convert to RRIF by age 71 | Before age 71 | Medium |
| Deferring OAS and CPP | Increases monthly benefits and delays clawback exposure | Requires financial flexibility to delay benefits | Between ages 65-70 | High |
| Managing Capital Gains | Reduces taxable income during retirement | Timing of asset sales is crucial; consider market conditions | Before age 65 | Medium |
Implementing these strategies requires careful planning and consideration of your unique financial situation. Consulting with a financial advisor or tax specialist can help tailor these approaches to your needs, ensuring you maximize your retirement income while minimizing the impact of OAS clawbacks.
FAQs
1. What is the OAS clawback threshold for 2025?
The OAS clawback threshold for 2025 is set at a net income of $90,997. If your income exceeds this amount, you’ll be subject to the clawback.
2. How much is the OAS clawback rate?
The clawback rate is 15% of your income above the threshold. For example, if your income exceeds the threshold by $10,000, you’d repay $1,500 (15% of $10,000).
3. Can I avoid the OAS clawback entirely?
While it may be challenging to avoid the clawback entirely, implementing strategies like income splitting, maximizing TFSA contributions, and deferring benefits can significantly reduce its impact.
4. Is CPP income considered when calculating the OAS clawback?
Yes, CPP income is included in your net income and can contribute to exceeding the OAS clawback threshold.
5. Should I consult a financial advisor for these strategies?
Yes, consulting a financial advisor or tax specialist is recommended to tailor these strategies to your specific financial situation and retirement goals.
