After striving to save for retirement, people can be resentful when their required withdrawals from retirement plans will result in the elimination of Old Age Security benefits, writes Rob Carrick, reporter and columnist for The Globe and Mail.
Not much gets retirees riled up like the clawback of Old Age Security benefits.
Financial planner Daryl Diamond recalls hearing from one woman who had retirement savings in the low seven-figure range, and was distraught over having to pay back her OAS.
"It was absolutely crushing her," he recalls. "It was going to ruin her retirement that she was going to have to give up all of the OAS payment."
Diamond is an expert in retirement income planning, and he has a solution for retirees with substantial savings who are upset about having to repay their OAS benefits. By carefully managing withdrawals from registered retirement savings plans and registered retirement income funds, it's possible for them to keep their taxable income low enough to retain the full OAS amount.
Let's get something straight up front, though. The OAS clawback does not actually have a huge negative impact on your income in retirement.
"On a net, after-tax basis, it's nominal," said Diamond, who runs Diamond Retirement Planning in Winnipeg and is the author of Your Retirement Income Blueprint: A Six-Step Plan to Design and Build a Secure Retirement.
"But it's just absolutely sand in people's gears. They say, wait a minute, I scrimped and saved and put all this money away and because I did a really good job, I'm being penalized?"
OAS is a federal social program designed to provide a very modest pension to low- to middle-income retirees. The maximum monthly benefit right now is $526.85, or $6,322.20 a year. The clawback of OAS benefits starts with a net income of $67,668, and it completely eliminates OAS with income of $109,764.
Diamond's clawback-avoidance strategy contradicts the conventional thinking that money should be left in a tax-sheltered retirement plan as long as possible. His view is that you can end up with too much money in your registered retirement plan.
You may, for example, have enough in your RRSP that your assets will keep growing even as you start making withdrawals. When you turn 71 and convert your RRSP into a RRIF, you may find that meeting the required annual minimum withdrawal puts you into OAS clawback territory.
Diamond's solution is to take more than you need out of your RRSP in your early retirement years, pay the tax on it and then park it in tax-efficient investments. By shrinking your RRSP, you put yourself in a position to draw less from your RRIF and thereby keep your total income low enough to keep all OAS benefits.
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