You work your whole life and retire at 65. Then, because you worked so hard, the Government keeps the pension that you were promised. It hardly seems fair. How can you stop this?
It may take a little planning. The Old Age Security (OAS) program includes a basic pension, indexed for in_ ation every January, April, July, and October. The claw-back occurs if your net individual income is above a set threshold (currently $66,335). This figure is also adjusted each year for inflation. For every dollar of income above the threshold, the amount of basic OAS pension reduces by 15 cents. It is clear from my conversations with retirees that many are concerned about this. Here are some simple strategies to help you minimize the clawback.
- Defer RRSP income. Eventually, RRSPs must be converted to income. In fact, the latest you can defer a RRSP is December 31 of the year in which you turn 71 and then take the minimum withdrawal each year to minimize your net income.
- If you have a younger spouse, use his or her age for RRIF planning to calculate the minimum RRIF income. It will lower your income.
- Tax-efficient income on non-registered RSP investments. When it comes to investment income from non-registered investments, different types of income are taxed differently. Interest income from GICs and term deposits are taxed at a high rate. Dividend income and capital gains enjoy a much lower tax rate.
- Use part of your non-registered funds to purchase an annuity to provide an income stream. 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.
- If 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.
- Final RRSP contribution. Up until and including age 71, if you have unused RRSP deduction room, make an annual RRSP contribution.
- Finally, for couples, the new pension-splitting rules can help reduce or eliminate the claw-back. Some couples who are not married may consider the advantages of filing together if they have been living together for awhile.
Check to see whether a portion of your OAS is being clawed back and plan to take it back for yourself.
When written in Chinese, the word “crisis” is composed of two characters–one represents danger, and the other represents opportunity.
– John F. Kennedy