OAS Clawback Explained: Shocking Facts You Want to Know!
OAS Clawback Explained: Shocking Facts You Want to Know!
The Ultimate Insider’s Guide to Understanding OAS Clawback
When it comes to retirement income, the Old Age Security (OAS) Clawback is a term that frequently raises eyebrows and sparks confusion. Many people feel entitled to their OAS benefits, having diligently paid taxes and contributed to society throughout their lives. However, the moment their income surpasses a certain threshold, the clawback kicks in, potentially leaving you feeling shortchanged and disillusioned.
This piece breaks down the OAS Clawback in plain language, demystifying its complexities and shedding light on when and why it occurs. Our goal is to empower you with the knowledge they need to navigate this aspect of your finances confidently, helping to ensure you receive the benefits you rightfully deserve without feeling ripped off by unexpected clawbacks.
I THINK I AM MUCH BETTER IN VIDEO! COME SUBSCRIBE TO ME ON YOUTUBE!
OAS — An Introduction
Old Age Security (OAS) is essentially a taxable pension provided by the government to individuals during their retirement years. Typically, these benefits kick in at age 65 (although you can defer to a later age), and it remains in effect until the recipient passes away. Similar to other governmental aids such as the child benefit, the OAS benefit is tied to one’s income. In essence, the higher an individual’s earnings, the less assistance they are eligible to receive. Moreover, if an individual’s income exceeds a specific threshold, they forfeit the benefit altogether. This stipulation is in place to try to help ensure that these benefits are allocated solely to those in genuine financial need.
Who Qualifies for OAS?
Unlike the Canada Pension Plan, which involves contributions from both you and your employer and is tied to your work history, OAS operates differently. It is funded by taxpayers and is not dependent on your employment record. To be eligible to receive OAS benefits while residing in Canada, you must be a Canadian citizen or legal resident at the time your OAS application is approved. Additionally, you must have resided in Canada for at least 10 years after reaching the age of 18.
You are not required to be currently residing in Canada to collect OAS benefits. If you are living outside of Canada, you must have been a Canadian citizen or legal resident on the day before you left Canada. Additionally, you need to have resided in Canada for at least 20 years after reaching the age of 18. Alternatively, you may still be eligible to receive OAS if the country where you reside has a social security agreement in place with Canada.
OAS Thresholds
In 2024, OAS offers a maximum monthly payment of $713.34 for individuals aged 65 to 74, while those aged 75 and over receive up to $784.67 per month. Additionally, to qualify for OAS benefits, your annual net world income in 2024 must be less than $142,609 if you are aged 65 to 74, and less than $148,179 if you are aged 75 and over.
OAS Clawback Start or Recovery Tax
The OAS clawback, formally termed the “recovery tax,” is a mechanism implemented by the government to gradually reduce your Old Age Security (OAS) payments once your taxable income surpasses a certain threshold. In 2024, this threshold is set at $90,997, though it increases annually to account for inflation. Essentially, if your current global taxable income exceeds this threshold, you may be subject to the recovery tax. This means that a portion of your OAS payments will be deducted in the subsequent year from your monthly cheques.
Assessing Your Responsibility for the Recovery Tax
If your taxable income surpasses $90,997, your pension undergoes a 15% reduction for every extra dollar earned. As said above, those aged 65–74 who earn more than $142,609 and individuals aged 75 or over with incomes exceeding $148,179 are disqualified from receiving this pension entirely.
So What Income Counts?
The critical factor here is “taxable” income. Most gifts, inheritances, life insurance policy payouts, and Tax-Free Savings Account (TFSA) withdrawals are not included in your taxable income and therefore do not impact your OAS. Conversely, salaries, dividends, capital gains, and Registered Retirement Savings Plan (RRSP) withdrawals are taxable sources of income that could potentially trigger a clawback.
How OAS Clawback Works
Calculating the OAS clawback is quite straightforward.
Here’s how it’s done:
- The government deducts $0.15 for every dollar of worldwide taxable net income exceeding $90,997 for 2024.
- Simply subtract the clawback threshold ($90,997) from your total worldwide taxable income.
- Then, multiply the result by 0.15 and divide by 12.
For example:
- Let’s say your income is $100,000.
- Subtract the threshold: $100,000 — $90,997 = $9,003
- Multiply by 0.15: $9,003 x 0.15 = $1,350.45.
- Divide by 12: $1,350.45 / 12 = $112.54.
So, your annual OAS would be reduced by $1,350.45, or $112.54 per month.
The government though handles any calculations and will send you a letter explaining any clawbacks.
Reducing Your Clawback
If your income has significantly decreased from the previous year, you might face a cash flow challenge because the government uses last year’s income to calculate this year’s OAS payments.
To address this issue, you can request a reduction in your clawback by filling out Form T1213 if you believe the current calculation is unfair.
Here are some easier ways to reduce your OAS clawback:
- Delay Taking OAS: Waiting to start receiving your OAS payments can make them bigger later on. For every month you delay, your monthly payment goes up a bit. Plus, because prices usually go up over time (inflation), the amount of money you can make before your OAS is reduced also goes up.
- Sell Stocks Before You Start OAS: If you have investments like stocks that have made money, you might want to sell them before you start getting OAS. This is because the money you make from selling stocks could be considered considered income from capital gains and could make your OAS payments smaller if you do it during your OAS payments.
- Income Split with Your Spouse or Spousal Gifts: You can give some of your money to your spouse to lower how much tax you have to pay. This could mean putting money into your spouse’s retirement savings or splitting some of your pension with them.
- Be Smart About Withdrawing from RRSPs: When you take money out of your RRSP (retirement savings), it counts as income and could make your OAS payments smaller. So, plan how much you take out carefully.
- Find Ways to Lower Your Taxable Income: There are different ways to lower how much money you have to pay taxes on while still saving money. One way is by putting money into RRSPs. Another is by writing off interest on loans used for investing. It’s a good idea to talk to an Investment Advisor Portfolio Manager to learn more about these options.
- Use a Holding Company (For High Earners): If you’re making a lot of money from investments, you might want to think about putting them into a company instead of having them in your own name. This can help you pay less tax. But this is a complicated strategy, so it’s important to get help from experts.
In the End
Navigating the complexities of the OAS clawback requires careful planning and consideration of various strategies. Whether it’s delaying OAS payments, strategically managing investments, or maximizing deductions, there are options available to minimize the impact of clawbacks on your retirement income. By understanding the rules and exploring these approaches, individuals can optimize their financial situation and make the most of their retirement benefits. However, it’s essential to seek guidance from an Investment Advisor Portfolio Manager to ensure that these strategies align with your specific circumstances and long-term goals. With proactive planning and informed decision-making, you can effectively mitigate the effects of the OAS clawback and enjoy a more secure financial future in retirement.
Did you know that navigating the uncertainties of the markets and your finances is generally smoother with the support of an investment advisor or portfolio manager? Studies consistently reveal that individuals who work with investment advisors and portfolio managers tend to have up to three times higher net worth on average, but that’s not all, there’s a significant impact on overall well-being, with those who seek professional advice exhibiting higher levels of happiness and lower anxiety. Having a guiding hand through the financial landscape proves beneficial not only in terms of monetary outcomes but also in fostering a sense of security and contentment, making the challenges of an uncertain year more manageable with professional assistance.
Look No Further, I am A Fiduciary..
However, unraveling the mystery of locating a trustworthy fiduciary advisor proves to be a perplexing task for many. A quick look at common Google searches related to the topic unveils a sense of urgency and a quest for guidance. Phrases like “Fiduciary financial advisors near me,” “Best fiduciary financial advisor,” and “Financial investment advisors near me” are entered into search engines hundreds of times daily, showcasing the widespread need for assistance in finding reliable fiduciary guidance.
Have Questions? Contact us!
We’ve assisted our clients through every stage of life. Even when you’re not aware that something might impact your financial future, it likely will to some extent. Engaging in a conversation with your investment advisor about any financial changes is an excellent approach to keeping your financial goals in focus.
We have expertise in cross-border wealth management for Canadians and US Residents. Don’t hesitate to reach out to us — we’re committed to providing tailored solutions for your cross-border financial needs.
For more information or to connect with me, you can reach out via email at macekadmin@iaprivatewealth.ca or get to know me better by exploring my engaging video content on YouTube
I share valuable insights and discussions on financial planning, market commentary, and investing concepts that can further enrich your understanding. Join me on my channel to discover more!
Don’t hesitate to reach out today at 1–888–324–4259 to discover more about how we can help you achieve your investment milestones.
Joe A. Macek, FMA, CIM, DMS, FCSI
Investment Advisor, Portfolio Manager
iA Private Wealth
Toll Free North America: 1–888–324–4259
Email: macekadmin@iaprivatewealth.ca
238 Portage Ave, 3rd Floor
Winnipeg, Manitoba R3C 0B1
26 Wellington Street East, Suite 700
Toronto, Ontario M5E 1S2
This information has been prepared by Joe Macek who is an Investment Advisor Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
This platform is solely for informational purposes. Investing involves risk and possible loss of principal capital. Comments by viewers or third-party rankings and recognitions are no guarantee of future investment outcomes and do not ensure that a viewer will experience a higher level of performance or results. Public comments posted on this site are not selected, amended, deleted, or sorted in any way. If applicable, certain editing of personal identifiable information and misinformation may be deleted. This content may be dated.
Sources:
Comments
Post a Comment