Insights from Bellwether Family Wealth

As Canadians approach retirement age, one of the most important sources of income is the Old Age Security (OAS) pension. However, if your income exceeds a certain threshold, you could face the OAS clawback, also known as the OAS Recovery Tax. In 2024, understanding how this clawback works and how to minimize its impact on your retirement income is more crucial than ever.

In this blog, we’ll break down the essentials of the OAS clawback in 2024 and provide insights from Bellwether Family Wealth on how to manage it effectively. Whether you're searching for the best certified financial advisor near me or simply want to learn more about this crucial aspect of retirement planning, this guide will help you make informed decisions for your future.

What Is the OAS Clawback?

The OAS clawback is a government mechanism that reduces the amount of OAS pension payments you receive if your income exceeds a certain threshold. In 2024, the threshold starts at approximately $86,912. For every dollar of income above this amount, you’ll be required to repay 15 cents of your OAS pension, with the full clawback occurring when your income reaches about $142,000.

This can significantly impact your retirement income if you're unaware of how to plan for it. Fortunately, with proper guidance from a financial advisor, there are strategies to minimize the clawback and protect more of your OAS payments.

How the OAS Clawback Works in 2024

The OAS clawback is calculated based on your net world income, including all sources of income, such as pensions, investment income, rental income, and employment earnings. It applies if your annual income exceeds the income recovery threshold the federal government sets. For every dollar you exceed this threshold, 15% is deducted from your OAS payments until the clawback eliminates your entire OAS benefit.

For example, if your income is $10,000 over the threshold, the clawback will be $1,500 (15% of $10,000). As income increases, the clawback grows, potentially reducing or eliminating your OAS pension entirely.

Strategies to Minimize the OAS Clawback

Managing your income below or near the OAS clawback threshold can help you maximize your pension benefits. Here are some strategies that Bellwether Family Wealth suggests to minimize the impact of the clawback:

1. Income Splitting

Income splitting with your spouse can effectively reduce your taxable income and avoid or minimize the OAS clawback. By transferring up to 50% of your eligible pension income to your lower-income spouse, you can reduce your overall family income and potentially stay below the clawback threshold.

2. RRSP and RRIF Withdrawals

When planning withdrawals from your RRSPs or RRIFs, it’s crucial to consider the impact on your income for that year. Large lump-sum withdrawals can push your income above the OAS clawback threshold, significantly reducing your benefits. Working with the best certified financial advisor near me can help you plan smaller, more strategic withdrawals over several years to minimize your taxable income.

3. Defer OAS Payments

If you do not need your OAS benefits, deferring them until age 70 can be advantageous. This can lead to increased monthly payments while giving you time to plan your income more effectively to avoid the clawback. By delaying OAS payments, you receive an enhanced pension amount, which could help you better manage your cash flow and reduce the clawback.

4. Tax-Efficient Investments

Certain investment strategies can help you manage your income and reduce your exposure to the OAS clawback. For example, investing in tax-efficient vehicles like Tax-Free Savings Accounts (TFSAs) can allow you to earn income without it being counted toward your taxable income, thus helping to keep your overall income below the clawback threshold.

5. Charitable Donations and Deductions

Donating to charitable organizations can reduce your taxable income, which may help reduce or avoid the OAS clawback. Tax credits for charitable donations can offset some of the income that would otherwise be subject to clawback. Discussing your charitable giving strategy with a certified financial advisor is a great way to ensure you're maximizing the benefits while supporting causes you care about.

The Importance of Working with a Certified Financial Advisor

Managing the OAS clawback can be complex, especially if you're dealing with multiple sources of income in retirement. Working with the best certified financial advisor near me can help you navigate these complexities, create a tax-efficient retirement plan, and ensure that you’re making the most of your OAS benefits.

At Bellwether Family Wealth, our team of experienced financial advisors is committed to helping you achieve your retirement goals while minimizing the impact of the OAS clawback. We offer personalized financial planning services tailored to your unique financial situation, ensuring your retirement income is optimized and protected.