Working during retirement can provide financial flexibility, but it may also reduce your Old Age Security (OAS) benefits through the OAS recovery tax, also known as the OAS clawback. This guide explains how the clawback works and provides actionable strategies to help you retain more of your hard-earned benefits.
Understanding the OAS Clawback
The OAS clawback reduces your OAS pension if your net income exceeds the annual threshold. For 2025, the threshold is $90,997, with a clawback rate of $0.15 for every dollar of income above this amount.
Example: OAS Clawback Calculation
If your net income is $100,000:
- Income above the threshold: $9,003 ($100,000 – $90,997).
- Clawback: $9,003 × 15% = $1,350.
- Net OAS (pre-tax): $8,732 – $1,350 = $7,382.
How Additional Income Sources Affect OAS
The OAS clawback includes all taxable income sources, such as:
- Employment income
- Canada Pension Plan (CPP) benefits
- Pension income (from a defined benefit plan, RRIF, or annuities)
- Investment income (dividends, interest, capital gains)
- Rental income
Example: Combined Income Sources
- Employment income: $100,000
- CPP benefits: $15,000
- OAS benefits: $8,732
Total net income: $123,732
Clawback calculation:
- Exceeds threshold by $32,735 ($123,732 – $90,997).
- Clawback: $32,735 × 15% = $4,910.
- Net OAS: $8,732 – $4,910 = $3,822.
Strategies to Minimize OAS Clawbacks
1. Split Income with a Spouse
- Defined Benefit (DB) Pension: Split at any age to reduce your net income.
- RRIF Income: Split starting at age 65.
Splitting income can lower taxable income, keeping you below the clawback threshold.
2. Delay OAS Benefits
Delaying your OAS past age 65 increases payouts by 0.6% per month (7.2% annually), up to a maximum of 36% at age 70.
Advantages of delaying OAS:
- Higher benefits result in a higher clawback threshold.
- Inflation-indexed increases maximize long-term payouts.
Example: Delayed OAS Benefits
- OAS at 65: $8,732.
- OAS at 70: $11,875 (36% higher).
- New clawback threshold: $170,163.
This provides more flexibility for higher income without penalties.
3. Delay CPP Benefits
While CPP has no clawback, delaying CPP boosts benefits by 0.7% per month (8.4% annually), up to 42% at age 70. This can help balance income sources in retirement.
4. Manage RRSP and RRIF Withdrawals
- Postpone RRSP-to-RRIF conversion until the mandatory age of 71.
- Take smaller RRIF withdrawals to reduce taxable income and avoid the clawback.
5. Use Tax-Free Savings Accounts (TFSA)
Withdrawals from a TFSA are not taxable and do not count toward the clawback threshold. This makes TFSAs ideal for covering retirement expenses.
Additional Benefits of Delaying OAS
10% Bonus at Age 75
If you delay OAS until age 70, the 10% increase at age 75 applies to the higher payout.
Example:
- Delayed OAS: $11,875.
- Bonus at 75: +$1,187 (vs. $872 if taken at 65).
Inflation Protection
Since OAS is indexed to inflation, delaying benefits increases the compounding effect of future adjustments.
How to Plan Effectively
1. Evaluate Your Net Income
Review your most recent tax return and estimate future income sources like CPP, employment, or RRIF withdrawals.
2. Consult a Financial Planner
Work with a professional to model income scenarios and determine the best timing for CPP and OAS.
3. Monitor the Clawback Zone
Stay updated on the annual clawback threshold and adjust your strategy as needed.
Summary
Minimizing OAS clawbacks requires a mix of smart planning and timing:
- Split income with your spouse.
- Delay OAS and CPP for higher payouts.
- Use TFSAs and manage taxable withdrawals strategically.
With these approaches, you can enjoy greater financial security and maximize your OAS benefits throughout retirement.
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