The Old Age SecurityL (OAS) pension offers retirees the flexibility to work and earn additional income, but it’s essential to understand how your earnings may affect your OAS payments. By planning wisely, you can minimize clawbacks and maximize your benefits.
Table of Contents
How the OAS Recovery Tax Works
While the OAS pension provides crucial support for Canadians aged 65 and older, high-income earners may face a reduction in their benefits due to the OAS recovery tax (also known as the clawback).
Income Thresholds for 2025
- Base Threshold: $86,912
- If your net income exceeds this amount, 15 cents for every dollar above the threshold is clawed back from your OAS payments.
- Maximum Threshold: $141,917
- If your income reaches this level, your entire OAS payment may be recovered through the tax.
Avoiding or Minimizing OAS Clawbacks
Smart financial strategies can help you retain more of your OAS pension while working during retirement.
1. Income Splitting
- What It Is: Share eligible pension income with your spouse or common-law partner to lower your net income.
- Benefit: This strategy can bring your income below the clawback threshold, reducing or eliminating the recovery tax.
2. Maximize Contributions to Tax-Deferred Plans
- Contribute to your Registered Retirement Savings Plan (RRSP) or other tax-deferred savings plans.
- Delay RRSP withdrawals until your income falls below the threshold to reduce taxable income during peak earning years.
3. Adjust Withdrawal Strategies
- Plan Withdrawals Carefully:
- Take out smaller amounts from Registered Retirement Income Funds (RRIFs) or other taxable accounts in years where your income is higher.
- Coordinate withdrawals to avoid exceeding the threshold.
- Delay OAS:
- Consider deferring your OAS pension. For every month you delay beyond age 65, your payments increase by 0.6%, up to a maximum of 36% at age 70.
4. Optimize Non-Taxable Income
- Focus on income sources that do not affect your net income, such as Tax-Free Savings Account (TFSA) withdrawals.
- Use TFSAs for major expenses to avoid pushing your income over the threshold.
GIS Payment Increase 2025: Check out the Payout
CRA February Benefits Payments 2025: Key Dates, Eligibility, and Amounts
How Much will CPP increase by 2025 in Canada?
Pensions & Family Benefits Updates for Quebec in 2025: Major Financial Changes
Expected Canada Pension Boost in March 2025: Key Updates to CPP and OAS You Need to Know
Steps to Manage OAS Recovery Tax
- Track Your Income:
- Keep an eye on your net income and assess its impact on your OAS payments.
- Use Tax Software or Financial Advisors:
- Leverage tools or professional advice to model your income scenarios and minimize clawbacks.
- Reassess Annually:
- OAS recovery tax calculations are based on your net income for the previous tax year. Review your financial situation yearly to adjust your strategy.
Working While Receiving the CPP: Maximizing Retirement Benefits
CPP and OAS Benefits After a Spouse’s Death: What You Need to Know
Benefits of Continuing to Work While Receiving OAS
Despite the clawback, working during retirement can provide significant benefits:
- Increased Financial Security:
Additional income can help cover rising living costs and provide a cushion for unexpected expenses. - Opportunity to Delay OAS:
Working income may allow you to delay OAS, increasing your future pension amount. - Engagement and Purpose:
Continuing to work keeps many retirees active and socially engaged, contributing to overall well-being.
Working while receiving OAS is a great way to stay active and financially secure in retirement. However, it’s crucial to plan your income carefully to avoid or minimize clawbacks due to the recovery tax. By using strategies like income splitting, optimizing tax-deferred savings, and managing withdrawals effectively, you can maximize your OAS benefits while enjoying the freedom to earn.
Stay informed and make retirement work for you—literally!