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MoneyWhy it’s still worth it for high-income seniors to apply for OAS

08:30  12 january  2019
08:30  12 january  2019 Source:   moneysense.ca

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Eileen is worried about the adverse impact on her taxes if she applies for OAS , and wonders if she should still apply .

While your spouse would not have any tax implications, her son would pay income tax on the RRSP withdrawal. There is also still the issue of whether you can be sure the funds will be used for the grandchildren’s education since Why it ’ s still worth it for high - income seniors to apply for OAS .

Why it’s still worth it for high-income seniors to apply for OAS© Used with permission of / © Rogers Media Inc. 2019.

Q: I am 70 years old and did not apply for OAS at age 65 because of my annual income from pensions and investments. It would be completely clawed back. It’s my understanding that I would still have to declare it as income . . . phantom income . . . which may impact federal taxes owed.

Is this correct? Or should I have applied?

– Eileen

A: Old Age Security (OAS) is a pension you can begin between age 65 and 70. If you start your pension later than 65, the monthly payments are higher for each month you defer.

Ask a Planner: Leave your question for Jason Heath »

For someone turning 65 in 2019, the maximum annualized pension is $7,217 if you have lived in Canada for at least 40 years after the age of 18. For someone who defers their pension to age 70, the annual maximum in 2019 rises to $9,816 (0.6 per cent for each month of deferral).

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And it ’ s important to remember that proper testamentary appointments like successor holders and beneficiaries can be just as important as having an up-to-date will. Why it ’ s still worth it for high - income seniors to apply for OAS .

It would be completely clawed back. It ’ s my understanding that I would still have to declare it as income . . . phantom income . . . which may impact federal taxes owed. Is this correct? Or should I have applied ? – Eileen. A: Old Age Security ( OAS ) is a pension you can begin between age 65 and 70.

High income earners must contend with OAS recovery tax or “clawback”, Eileen. The way clawback works is if your net income on line 236 of your 2018 tax return exceeds $75,910 ($77,580 for 2019), your OAS pension is reduced by 15 per cent of the excess. Regular income tax is also payable on your net OAS pension – net of the clawback – with rates starting at 28 per cent and rising depending on your actual income and province or territory of residence.

Because you are 70, Eileen, in order to have your full pension clawed back, your net income would have to exceed $141,348 on your 2018 tax return. A 65-year old in 2019 would be subject to full clawback at only $123,386 of 2018 income.

At worst, you could have 100 per cent of your OAS clawed back, so while this may seem like “phantom income”, as you put it, you’d have nothing gained and nothing lost (except your time to apply).

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# OAS it ’ s not just an instrument to strengthen our democratic institutions such as bloque. My latest @MoneySense article: Why it ’ s still worth it for high - income # seniors to apply for # OAS . http # OAS must knows, there are several proposals to eradicate poverty as bloque in all America.

It also affects the next job offers you get when you move companies. There’ s no question that everyone wants a All of these benefits are still worth considering though, because they So always explain why you want a higher salary, and then back it up with why you think you’re worth that extra money.

You can also receive up to 12 months of retroactive OAS, Eileen, assuming you are currently past your 70th birthday.

Even if your income exceeds the upper threshold of the OAS clawback limit, I think I would still apply for OAS. It’s at least possible the rules change or your income changes or something results in an OAS entitlement in the future. The application is a one-time process and reasonably straightforward. The form to apply can be found here.

If your income exceeds even the upper threshold of $141,348 for the maximum age 70 pension, Eileen, receiving OAS may not have moved the needle much for you financially. Regardless, working with seniors who have their OAS clawed back, I appreciate that it can be frustrating, and some people want to find ways to reduce that clawback.

Amongst the best options:

Maximize your Tax Free Savings Account (TFSA), where investment income and capital gains are tax-free. Invest for deferred capital gains in your non-registered account, as interest and dividends give rise to current year income and therefore increase OAS clawback. Consider tax-enhanced investment options like corporate class or swap-based funds, investments that pay a return of tax-free capital, flow-through shares, or life insurance strategies, if appropriate. Maximize all available tax deductions like split-pension deductions, carrying charges, and so on to ensure your net income is minimized. Consider gifting assets to children, grandchildren, or charity, if doing so won’t compromise your own retirement, as a means of decreasing your taxable investment income. Consider a family trust or estate freeze as a means of spitting income with lower income family members like children or grandchildren.

In summary, Eileen, you may be correct, in that your OAS pension may just be phantom income if your other income is high enough. Regardless, I think you should apply, retroactive to your 70th birthday, and then consider if there are strategies to lower your income and increase your OAS entitlement.

Ask a Planner: Leave your question for Jason Heath »

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever

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