As more boomers move into their 60s and think about retiring, the question of OAS clawbacks always comes into the conversation.
The OAS program is an important component of many Canadians’ retirement income and includes the basic OAS pension, the Guaranteed Income Supplement (GIS), the Allowance, and the Allowance for the Survivor.
The program which is fully funded by the Canadian Government’s tax revenues came into force in 1952 and has been amended several times since.
The current 2024 maximum OAS monthly benefit is about $713 which translates to just over $8,560 per year of income. Pensioners with an income of over $90,997 will start to have their pension reduced by $.15 per $1.00 of income above this threshold. When the pensioner’s net income rises above $142,609 the whole OAS pension will be eliminated.
However, if you look closely at the numbers, 95% of all eligible seniors receive their full OAS pension. A further 98% receive a portion of it, while only 2% of eligible seniors have their full OAS pension clawed back.
The two biggest sources of the Clawback headache seem to be the required minimum Registered Retirement Income Fund (RIFF) withdrawals; and the grossed-up amounts of Canadian dividends.
Income splitting with your spouse or common-law partner is one way to reduce or eliminate the clawback. Pension income splitting was first introduced in 2007; this allows Canadian couples who receive ‘eligible’ pension income to split up to 50% of their income with their spouse or common-law partner. So if your spouse or partner is in a lower tax bracket; income splitting should be a no-brainer.
For example, take the case of Ontario retirees John (65) and Suzan (60). John’s pension income that is eligible for splitting is $145,000 and he has an additional $5000 in investment income. At this income level he would be above the OAS clawback threshold and therefore would have to repay all his benefits.
However, let’s say Suzan only has $15,000 of investment income. If John and Suzan jointly elect to split Jack’s pension income 50/50, not only will John’s income taxes be reduced by moving from a higher tax bracket to a lower tax bracket, it will have a cascading effect. Jack will be allowed to claim some of his age credit (which would be clawed back), and Suzan can now claim both the federal and Ontario pension income credits.
Between taxes, credits, and John’s full entitlement to his OAS the couple will save thousands.
So is 50-50 income splitting for everyone? Not necessarily, but it is worth finding out. Make sure to ask your accountant or talk to us, because finding the ideal split could mean more money in your pocket.
Have a great weekend,
Tracey & Paige
Sources:
https://retirehappy.ca/minimizing-old-age-security-clawback/ https://www.jamiegolombek.com/
Photo by Matt Bennett on Unsplash
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