Episode #7: Understanding Old Age Security (OAS)

In this episode of the Retirement IQ Podcast, retirement wealth coach John Stregger takes a closer look at one of Canada’s most important retirement benefits, Old Age Security (OAS). Building on last week’s discussion about the Canada Pension Plan (CPP), John explains how OAS works, who qualifies, and how to make the most of this lifetime benefit.

Learn why OAS is a taxable benefit starting at age 65, how your income affects what you receive, and what happens if you cross the OAS clawback threshold. John shares smart strategies to reduce or avoid the clawback, including deferring OAS, income splitting, and timing your RRSP withdrawals to manage your taxable income.

With practical examples and clear insights, this episode helps you understand how OAS fits into your overall retirement income strategy—and how careful planning today can help you maximize your income tomorrow.

Chapters

• 0:00 Introduction to Retirement IQ Podcast
• 0:19 Overview of Old Age Security (OAS)
• 0:50 What is OAS?
• 1:02 Eligibility for OAS
• 1:34 Disclaimer on Detailed Numbers
• 2:28 OAS Payment Amounts
• 2:40 OAS Clawback Explained
• 3:56 How to Qualify for OAS
• 5:05 Strategies to Reduce OAS Clawback
• 6:06 Strategy 1: Defer OAS
• 7:12 Strategy 2: Sell Stocks Before Collecting OAS
• 8:07 Strategy 4: Plan RRSP Contributions Carefully
• 9:11 Strategy 3: Income Splitting with Spouse
• 10:03 Conclusion and Additional Resources
• 10:31 Disclaimer on General Information

Transcript

Episode #7: Understanding Old Age Security (OAS)

John Stregger: 00:00 - 10:20

Hey, everyone. Welcome to another edition of Retirement IQ, where I help you, our listener, better understand all things retirement so that you can build the kind of retirement you want to have. I'm your host, John Stregger

And today, I want to build on our last episode, which was focused on the Canada Pension Plan. Today, I want to drill down on another government program, which most of you are going to receive, and that is the old age security benefit. Just like on our last CPP episode, I'm going to give you the Kohl's notes on how old age security works and how you can best maximize its full value to you.

So what is old age security, or what's more commonly referred to as OAS? OAS is a taxable government benefit you might receive in retirement. OAS benefits can start as early as age 65, and they continue as long as you live.

Like many other government benefits, however, the amount you receive is dependent upon your income. Generally speaking, the more you make, the less you're gonna receive. And if you make more than a certain amount, you stop getting the benefit altogether. And that's because benefits like these, they're meant only for people who truly need them.

Now, before I jump into some of the details here, I want to provide you with a bit of a disclaimer. The purpose of this podcast isn't to give you detailed numbers around government benefits. You get an automatic raise to over $800 if you're over 75.

Now, how do you qualify? There are two requirements to qualify for OAS. Unlike the Canada Pension Plan, neither you nor your employer pays into OAS directly, and it's completely unrelated to your work history. Instead, the program is funded from general tax revenues.

So what are the two requirements to collect it? Number one, you must be a Canadian citizen or legal resident when your OAS application is approved, and you have to have lived in Canada for at least 10 years after turning age 18. You can also collect if you live outside of Canada.

Before, the government reduces benefits based on your income through something called a recovery tax, but that's more commonly referred to as OAS clawback. So what is OAS Clawback?

In my experience in working with couples who are either retired or verging on retirement, the topic of OAS Clawback is widely misunderstood. Most people I talk to believe that the government eliminates your OAS payment once you hit an initial threshold, which is not quite true. How it really works is that the government starts to gradually reduce your OAS payment amount if you make over $93,000 in taxable income.

Here's how it works. For every taxable dollar you make over $93,000, your annual OAS pension will be reduced by 15 cents per year. So if you have taxable income from salaries, dividends, pensions, RIFs, these will all add to your taxable income and potentially reduce your OAS if they total $93,000 or more.

To give you perspective on the clawback, here's a rule of thumb I use with my clients. For every $8,000 of income you receive over and above $93,000, your monthly OAS income will be reduced by $100 per month. That's why when you hit $150,000 or more of annual income, you effectively grind down your OAS benefit to zero.

You personally don't need to do anything in terms of calculations. The government will do the math for you and send you a letter detailing any clawbacks. Since the government is using last year's income to determine this year's OAS payment, you might find yourself in a bit of a cashflow pickle if your income has drastically dropped from last year. So in that case, you do want to do some advanced planning if you count on that OAS payment for your income needs.

Now, if you do find yourself in a situation where you might be facing a clawback, here are a few strategies available to reduce your clawback and maximize your OAS benefits.

Number one, defer OAS. There's a nice little benefit waiting for you in the form of a raise should you choose to defer your OAS. You can choose to defer your OAS payment for up to five years from age 65 to 70, which has an added benefit of an increase to your pension amount when you do decide to take it.

For every month you choose to defer OAS, your monthly payment is automatically increased by 0.6%, which is 7.2% per year. That means if you wait till age 70 to start receiving OAS, your lifetime OAS pension will be 36% higher. So instead of receiving $727 per month, you can defer and receive over $1,000 per month at age 70. And that's all indexed to inflation.

That period, between age 65 and 70, can also be used as a time where you possibly withdraw RRSP money so that it doesn't impact your clawback and impact your OAS income. There's many tax and pension planning opportunities during this window, which you should explore with your advisor.

Number two, sell stocks in years before you collect OAS. Since capital gains count as taxable income, those gains could impact your clawback. Therefore, it might be prudent to realize some of those gains before you choose to collect OAS. Now, this is definitely something that you need to consult an accountant or a tax advisor before acting on.

Number three, give money to your spouse. Now beyond the obvious emotional benefits, being married or in a common law relationship also has its economic advantages. In our tax system, there are certain scenarios where you are able to shift or share taxable income with your spouse in order to potentially pay lower taxes.

The term used to describe sharing income is income splitting. It can only be achieved in certain circumstances. A couple of examples of income splitting include if you have a pension income you can split that with your spouse and if you're over age 65 you can also split your RIF income.

One income splitting strategy which we advocate during your accumulation years is utilizing something called the Spousal RRSP. In short, a spousal RRSP allows you to accumulate money in both you and your spouse's name, which can be beneficial at retirement when withdrawing income from those RRSP accounts.

A fourth consideration is to think or plan carefully your contributions to your RRSP accounts. Now, if you've been a diligent saver your entire life and haven't done a retirement income tax projection, I would highly encourage you to do so. We work with many retired couples that have done an amazing job at building out their wealth, and now they're faced with tax problems they never saw coming.

When you build wealth within your RRSP, at some point, you're gonna be forced to withdraw money and pay tax on that money. This can lead to unintended consequences, such as paying higher than expected taxes and OAS clawbacks. With a little advanced planning, this can be addressed and potentially minimized.

So talk to your advisor and make sure that your decisions today are aligned with your expectations for tomorrow.

Now, if you want to learn more about OAS and all things retirement planning, come visit me at freeretirementreport.ca. I'm John Strager. Thank you for listening to another episode of Retirement IQ. Have a great day.

Narrator: 10:31 - 10:48

The information provided in this podcast is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax, or other professional advisors.