Working in retirement can provide financial flexibility, but it may also impact your Old Age Security (OAS) benefits through the OAS recovery tax, commonly referred to as the OAS clawback. Here’s a detailed guide on understanding and minimizing OAS clawbacks, along with strategies for managing your income in retirement.
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Understanding the OAS Clawback
The OAS clawback reduces your OAS pension when your net income exceeds a specific threshold. For 2025, this threshold is $90,997. The clawback rate is $0.15 for every dollar of net income above this amount.
Example: OAS Clawback Calculation
If your net income is $100,000:
- Your income exceeds the threshold by $9,003 ($100,000 – $90,997).
- The clawback is $9,003 × 15% = $1,350.
- If your annual OAS benefit is $8,732, the net OAS after clawback will be $7,382 (pre-tax).
How Additional Income Sources Affect OAS
The OAS clawback considers your total net income, which includes:
- Employment income
- Canada Pension Plan (CPP) benefits
- Pension income (defined benefit, RRIF, or annuities)
- Investment income (dividends, interest, and capital gains)
- Rental income
Example: Multiple Income Sources
If your income sources include:
- Employment income: $100,000
- CPP benefits: $15,000
- OAS benefits: $8,732
Your total net income is $123,732, exceeding the clawback threshold by $32,735 ($123,732 – $90,997).
The OAS clawback in this case is $32,735 × 15% = $4,910.
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Strategies to Minimize OAS Clawbacks
1. Income Splitting with a Spouse
- Defined Benefit (DB) Pension: Split pension income with a spouse at any age.
- Registered Retirement Income Fund (RRIF): Begin splitting RRIF income at age 65.
Income splitting can lower your net income, keeping you below the OAS clawback threshold.
2. Delay OAS Benefits
Delaying your OAS benefits beyond age 65 increases the payout by 0.6% per month (7.2% annually), up to a maximum of 36% at age 70. This strategy has two key advantages:
- A higher annual OAS benefit allows for a higher clawback threshold.
- Increased benefits are inflation-protected, offering greater value over time.
Example: Delayed OAS Benefits
If your OAS at 65 is $8,732, delaying it until 70 increases it to $11,875 (36% higher).
The clawback threshold increases accordingly:
Threshold = (OAS/15%) + 90,997 = (11,827/0.15) = 170,163
This extended threshold provides greater flexibility for higher retirement income.
3. Consider Delaying CPP
While CPP does not have a clawback, delaying CPP also increases benefits by 0.7% per month (8.4% annually), up to a maximum of 42% at age 70. This may allow you to balance income sources effectively.
4. Manage Withdrawals from Registered Plans
Minimize RRIF withdrawals or delay converting an RRSP to a RRIF until mandatory at age 71. Smaller withdrawals reduce taxable income, potentially avoiding OAS clawbacks.
5. Invest in Tax-Advantaged Accounts
- Tax-Free Savings Account (TFSA): Withdrawals do not count as taxable income.
- Dividend and Capital Gains: Optimize investment strategies to minimize taxable income.
Additional Benefits of Delaying OAS
- 10% Increase at Age 75
If you delay OAS until age 70, the 10% bonus at age 75 applies to the delayed amount, not the age-65 baseline. For example:- Delayed OAS: $11,875
- 10% increase at 75: +$1,187, compared to +$872 at the age-65 rate.
- Inflation Protection Since OAS is indexed to inflation, delaying benefits maximizes the compounding effect of inflation adjustments.
Planning for Retirement While Working
- Evaluate Net Income
Review your 2023 tax return and estimate any additional income for 2025, such as CPP or RRIF withdrawals. - Consult a Professional
Work with an accountant or financial planner to model different income scenarios. Use projections to decide on the best timing for CPP and OAS benefits. - Check the Clawback Zone Annually
Stay updated on the OAS clawback threshold and adjust your plans accordingly.
By understanding the OAS clawback and implementing these strategies, you can better manage your retirement income while minimizing losses. Planning ensures that you maximize your benefits and financial security in retirement.
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