The Canada Pension Plan (CPP) is a vital source of income for retirees, but for those also receiving Old Age Security (OAS), there’s a hidden challenge known as the OAS clawback.
This reduction in OAS benefits is tied to your overall income and can significantly impact your retirement funds. In this guide, we’ll explore how the OAS clawback works, how your CPP benefits contribute to it, and ways to avoid it, so you can maximize your retirement income.
What is the OAS Clawback?
The OAS clawback refers to the reduction in OAS benefits for individuals who have an income over a certain threshold. For every dollar of income above $90,977, OAS benefits are reduced by $0.15. At $149,000 in income, OAS benefits are completely clawed back, meaning the individual would receive no OAS payments.
The key point here is that CPP benefits are included in the income calculation that determines if you’ll face the OAS clawback.
While CPP benefits provide much-needed financial support, they can push your income above the threshold, leading to a reduction in your OAS payments.
How Does CPP Impact the OAS Clawback?
When you’re receiving CPP benefits, that income is counted as part of your overall “net income.” This means if you’re receiving substantial CPP payments, it could contribute to crossing the OAS clawback threshold. Here’s an example:
- Without CPP: If you earn $80,000 from an employer pension, you do not face the clawback.
- With CPP: If you also receive $20,000 annually in CPP, your total income will increase to $100,000, which will likely trigger the OAS clawback.
The OAS clawback is essentially a way to reduce the benefits for those who have higher incomes, but there are strategies you can use to minimize its impact.
Ways to Avoid the OAS Clawback
1. Work Fewer Hours
One simple way to avoid the OAS clawback is to reduce your work hours. This will decrease your total income, potentially keeping you below the clawback threshold.
For individuals still working in their 60s and earning a substantial income, cutting back on hours can significantly reduce the clawback impact.
2. Delay Taking CPP
Another strategy is to delay taking your CPP benefits. While OAS starts automatically at age 65, CPP benefits can be deferred until you’re 70.
By choosing not to take CPP early, you lower your income in the years leading up to 70, thus avoiding the OAS clawback. Additionally, delaying CPP increases your benefit amount once you start collecting it.
3. Claim More Tax Breaks
You can also reduce your net income by claiming more tax deductions. Many people miss out on potential deductions, such as work expenses, donations, or tuition fees.
By increasing your tax-deductible expenses, you lower your income and reduce the impact of the OAS clawback.
4. Invest in an RRSP
Investing in a Registered Retirement Savings Plan (RRSP) is another effective way to lower your income. Contributions to an RRSP reduce your taxable income, which can help keep your total income below the OAS clawback threshold. The RRSP allows you to contribute a portion of your income each year and defer taxes until withdrawal.
The Role of RRSPs in Avoiding the OAS Clawback
An RRSP not only offers a tax break in the year you contribute, but it also helps you build your retirement savings. The funds grow tax-deferred until you withdraw them, which means you can lower your taxable income in your working years and avoid the OAS clawback.
An example investment could be the BMO Canadian Dividend ETF, which offers decent returns while minimizing risk.
| Factor | Amount/Percentage |
|---|---|
| OAS Clawback Threshold | $90,977 (income above this is subject to clawback) |
| Clawback Rate | $0.15 for every dollar over the threshold |
| Full Clawback Income Level | $149,000 (no OAS benefits after this point) |
| CPP Benefit Impact | CPP payments contribute to total income calculation |
| RRSP Contribution | Reduces taxable income, helping to avoid clawback |
The OAS clawback can impact your retirement income, but by implementing strategies such as delaying your CPP benefits, working fewer hours, and investing in an RRSP, you can minimize its effects.
It’s important to plan ahead and understand how CPP benefits interact with OAS, as doing so can help you avoid unnecessary reductions in your benefits.
Consider these strategies to ensure you receive the full amount of OAS benefits you’re entitled to, providing greater financial stability in retirement.
FAQs
1. What is the OAS clawback, and how does it affect me?
The OAS clawback reduces your Old Age Security benefits by $0.15 for every dollar of income above $90,977. At $149,000, you would lose all OAS benefits. CPP benefits contribute to your total income and can trigger the clawback.
2. Can I avoid the OAS clawback by not working?
Yes, reducing your income by working fewer hours can help keep your total income below the OAS clawback threshold, thus reducing or eliminating the clawback.
3. How can I reduce my net income to avoid the OAS clawback?
You can reduce your net income by contributing to an RRSP, claiming more tax breaks, and delaying your CPP benefits to lower your total taxable income.
