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Tag: OAS clawback

  • How to plan for taxes in retirement in Canada – MoneySense

    How to plan for taxes in retirement in Canada – MoneySense

    The impact of your marginal tax rate

    It’s important to clarify, Ken, that if you have a minimum RRIF withdrawal with no tax withheld, that does not mean that income is tax-free. When you report your RRIF and other income sources on your tax return for the year, you may still owe tax.

    Canada has progressive tax rates so that higher levels of income are taxed at higher rates. For example, in Ontario, the first $12,000 or so you earn has no tax. The next roughly $3,000 has 15% tax. And the next $36,000 of income after that has about 20% tax. The type of income you earn may change these rates, as will tax deductions and credits. But if we kept going to higher incomes, there would be incremental increases in tax rates.

    If you have a higher income, your entire income is not taxed at the higher tax rate. Incremental tax rates lead to income being taxed at different rates as you move up through the tax brackets.

    This is why retirees tend to have tax owing. If you have a $10,000 pension, you may have no tax withheld at source. But if you have $60,000 of other income, you might owe 30% tax on that pension income.

    Getting ahead of tax installment requests

    If you owe more than $3,000 of tax in two consecutive years (or $1,800 in tax for two years in Quebec), the Canada Revenue Agency (CRA) (or Revenu Quebec) will start asking you to prepay your tax for the following year. This is called a quarterly income tax installment request.

    Installments—along with OAS clawbacks—tend to be the two cursed tax issues for retirees.

    You can reduce your installments by requesting higher withholding tax on your CPP, OAS, pension or RRSP/RRIF withdrawals, Ken. This optional tax withholding might be preferable if you would rather not owe tax or prefer to limit your installment requirements. If you can get your withholding tax rate estimated accurately, you may be able to better spend money coming into your bank account because it is all yours, and not accruing a tax liability.

    The choice is yours

    Many retirees do not have sufficient tax withheld by default. So, quarterly tax installments are common at that stage of life. But owing tax does not have to be a given if you prefer to increase your optional withholding tax.

    Jason Heath, CFP

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  • OAS payment dates in 2024, and more to know about Old Age Security – MoneySense

    OAS payment dates in 2024, and more to know about Old Age Security – MoneySense

    For example, for income year 2023, the threshold amount is $86,912. If your income in 2023 was $120,000, then your repayment would be 15% of $33,088 (the difference between $120,000 and $86,912). That comes out to $4,963.20.

    OAS clawbacks are paid off in 12 monthly payments, starting in July of the following tax year (in this case, 2024) and ending the next June (2025, in this example). This July-through-June period is called the “recovery tax period.” Continuing our example: $4,963.20 divided by 12 is $413.60. That’s how much you would repay each month from July 2024 to June 2025. (See the OAS recovery tax thresholds for income years 2022 and 2024.)

    How can I avoid OAS clawbacks?

    With some planning, it may be possible to reduce or avoid OAS clawbacks. One strategy is splitting pension income with a spouse who has a lower marginal tax rate. Another strategy is to base withdrawals from your registered retirement income fund (RRIF) on the younger spouse’s age—your minimum withdrawals may be lower. Keep in mind that different kinds of investment income are taxed differently, too. (Learn more about how passive income is taxed.) Consider speaking to a financial advisor or tax planner about these and other strategies. 

    What is the Guaranteed Income Supplement (GIS)?

    The Guaranteed Income Supplement (GIS) is a part of the OAS program that provides an additional, non-taxable monthly payment to Canadian residents who receive the OAS and whose previous-year income is below a certain threshold. Like OAS, the GIS is indexed to inflation.

    The income threshold changes annually. For example, from July to September in 2024, the threshold is $21,768 for a single person. If your 2023 income was less than that, you may qualify for the GIS. 

    For couples, the maximum income thresholds for combined annual income in 2023 are:

    • $28,752 if your spouse/common-law partner receives the full OAS pension
    • $52,176 if your spouse/common-law partner does not receive OAS
    • $40,272 if your spouse/common-law partner receives the Allowance benefit (a non-taxable payment for Canadians aged 60 to 64 whose partner is eligible for the GIS and your combined income is below the threshold for the Allowance)

    If you don’t receive a letter from the government about the GIS, you can submit an application through a My Service Canada Account or by filling out a paper form and submitting it to Service Canada. You can apply for OAS and the GIS at the same time. Learn more about applying for the GIS.

    Keph Senett

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  • “We’re set for life. Should we cash out an RRSP?” – MoneySense

    “We’re set for life. Should we cash out an RRSP?” – MoneySense

    Withdrawing from an RRSP before age 70

    Are you thinking you’d like to withdraw everything from your RRSP before starting your OAS or age 70? This way, if you die after age 70, there’s no RRSP/RRIF to transfer to your wife, no resulting income increase for her, and therefore no OAS clawback. This sounds like a good idea; let’s play it out and see. Start by converting your RRSP to a RRIF (registered retirement income fund) so you can split your pension income with your wife; you cannot split RRSP withdrawals.

    To deplete your RRIF of $200,000 plus investment growth within five years, draw out about $45,000 a year and, at the same time, delay your OAS pension until age 70. The OAS pension increases by 0.6% per month for every month you delay beyond age 65 and if you delay until age 70 it will increase by 36%, guaranteed, and it is an indexed pension that will last a lifetime under current legislation.

    What may have been a little better is delaying your CPP as it increases by 0.7%/month and the initial pension amount is based off the YMPE (yearly maximum pensionable earnings) which has historically increased faster than the rate of inflation, meaning that by delaying CPP to age 70 it may increase by more than 42%. 

    With your RRIF depleted, your wife will not experience an OAS clawback if you die before she does. Mission accomplished, but we should question the strategy. What are you going to do with the money you take out of your RRIF and how much money will you have after tax? 

    Consequences of accelerated withdrawals from a RRIF

    I estimate that, in Ontario, your $45,000 after-tax RRIF withdrawal will leave you with $28,451 to invest. So, rather than having $45,000 growing and compounding tax sheltered you will have $28,451 growing and compounding. Ideally, if you have the room, you will invest this money in a tax-free savings account (TFSA), where it will also be tax sheltered, otherwise, you will invest in a non-registered account. A non-registered account means paying tax on interest, dividends and/or capital gains as they are earned, probate and no pension income splitting. 

    I should acknowledge that, if your intention is to spend the RRSP and have fun that is a perfectly suitable strategy, especially when you know the income, you need is $147,000 per year and you have indexed pensions to support that income. The problem for me is it makes for a short article, so let’s continue the analysis. 

    What would happen if, instead of drawing everything from your RRIF, you drew just enough to supplement your OAS pension while delaying it to age 70? What if, at age 72, your RRIF remains at about $200,000 and the mandatory minimum withdrawal is $10,800. You could split that $10,800 with your wife and not be subject to OAS clawback. Of course, when you die the RRIF will transfer to your wife, who will no longer be able to pension split and her OAS pension will likely be impacted.

    Stop trying to predict the future and enjoy your money

    Randy, I think you can see there is no clear-cut winning strategy here. Either draw RRSP/RRIF early or leave it to grow. You may read about strategies involving income averaging or early RRIF withdrawals to minimize tax, but often I find these to be more smart-sounding strategies rather than winning strategies. There are so many variables to account for, the analysis must be done using sophisticated planning software in conjunction with your life plan.

    Allan Norman, MSc, CFP, CIM

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  • Where should working retirees put extra income: A TFSA or an RRSP? – MoneySense

    Where should working retirees put extra income: A TFSA or an RRSP? – MoneySense

    RRSP vs. TFSA for retirees

    Now to your question: Should you contribute to your RRSP or TFSA? I don’t know your circumstances, but I can show you the math. In the table below, you are going to see that there is no real difference if your marginal tax rate is the same at time of contribution and time of withdrawal.

    RRSP vs. TFSA comparison on a $10,000 contribution over one year

    RRSP TFSA
    Gross contribution $10,000 $10,000
    Income tax (30% tax rate) $0 $3,000
    Net contribution $10,000 $7,000
    5% investment growth $500 $350
    Value of account $10,500 $7,350
    Tax owing $3,150 $0.00
    After tax value $7,350 $7,350

    The math for retires investing in an RRSP and TFSA

    The above table shows that all things being equal a dollar invested into a RRSP or TFSA yields the same results. This is why it’s argued that an RRSP provides tax-free growth after all if, dollar for dollar, it gives the same after-tax value as a TFSA.

    How could it not?

    You may have questions about the table. For example, if you invest $10,000 and end up with $7,350 after one year, how is that a good investment? The $10,000 number is a before-tax figure. Remember, if you’re given $10,000 at the beginning of the year, and have a marginal tax rate of 30%, then you would be left with $7,000. Investing in a RRSP or TFSA leaves you with $7,350 after tax, so you have a gain.

    The other thing to remember is that RRSP contributions are made with pre-taxed money and TFSA contributions are made with after-tax money. This is why you see the $3,000 income tax entry under the TFSA column, to make it a fair comparison. 

    Where should Canadian retirees put their money

    Now to your question Gary, should you contribute to your RRSP or TFSA? You see there’s no difference between investing inside an RRSP or a TFSA if your marginal tax rate is the same at time of contribution and withdrawal. If your marginal tax rate is higher at time of withdrawal, then the TFSA has the advantage. Conversely, if your tax rate is lower at time of withdrawal the advantage goes to the RRSP.

    Also, consider that RRSPs and TFSAs are both available tax shelters to maximize when sensible and if possible. Canadians are to only contribute to their RRSPs until they turn 71, whereas TFSA contributions can be made right up until death. If there’s a chance you receive a lump sum of money from an inheritance, home sale, and so on, you may want to save your TFSA contribution room and use your RRSP now, while you can. 

    There are some other finer details to think about. Does the RRSP tax deduction help with your age credit? Will future RRSP withdrawals result in OAS or Guaranteed Income Supplement clawback?

    Allan Norman, MSc, CFP, CIM

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  • OAS entitlement and deferral rules for immigrants to Canada – MoneySense

    OAS entitlement and deferral rules for immigrants to Canada – MoneySense

    You generally need 40 years of residency in Canada after the age of 18 to qualify for the maximum OAS pension. The maximum monthly payment as of the fourth quarter of 2023 is $707.68 for someone who started their OAS at age 65. Someone aged 75 or older would be entitled to up to $778.45.

    Exceptions to the OAS residency requirement

    There may be situations where you qualify for the full pension without meeting the 40-year residency requirement. One example would be if you were over 25 and lived in Canada or had an immigration visa on or before July 1, 1977.

    Another instance where you may qualify for a higher pension is if you lived in a country with a social security agreement with Canada. Time spent in other countries may count towards your OAS residency formula. If you worked outside Canada for the Canadian Armed Forces or an international charitable organization, this time might also count.

    Deferring OAS to increase residency requirements

    If you have under 40 years of residency, your pension is pro-rated. You need to have lived in Canada for at least 10 years after the age of 18 if you apply for OAS as a Canadian resident. If you live outside of Canada when you apply, you need 20 years of residency.

    Interestingly, Amin, you can defer your OAS pension after age 65 to increase your residency requirements. This can work well for someone who is trying to get to 10 or 20 years, respectively, to qualify for the pension at all. In your case, the deferral will not have an impact on the residency calculation. I will explain why.

    The reason is an OAS recipient deferring their pension after age 65 can only benefit from one of two enhancements: one, the years of residency; or two, the age-based increase. If you defer OAS to after age 65, your age 65 entitlement increases by 0.6% per month or 7.2% per year of deferral. You can start it as late as 70 for a maximum 36% increase.

    If you get an extra year or 1/40th of residency, that amounts to a 2.5% boost in your OAS.

    Unfortunately, Amin, you cannot get the 2.5% residency boost and the 7.2% age boost for deferring. You get the higher of the two, which is obviously the age-based adjustment of 7.2%.

    Jason Heath, CFP

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