How do I avoid Old Age Security clawbacks due to high dividends?

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By Julie Cazzin with Allan Norman

Q: My spouse and I are 83 and 80, respectively, and I’m shedding my Old Age Security (OAS) because of dividends and my registered retirement income fund (RRIF) withdrawals. I want once I was youthful that somebody had informed me dividends could possibly be an issue as a retiree. I’m pondering of cashing out my RRIF this 12 months and cashing in my shares for index funds so I can accumulate my OAS pension. Does this make sense? Our tax-free savings accounts (TFSAs) are maximized, I’ve $600,000 in RRIFs in addition to a pension of $45,000 per 12 months, and my spouse has $490,000 in a RIFF. Now we have non-registered investments of about $3.5 million with a dividend yield of about 3.2 per cent, and a small rental in my spouse’s title with an revenue of $9,000 per 12 months. — Tim

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FP Solutions: You might be in a great spot, Tim, and it’s sensible to consider how one can decrease your taxable revenue to scale back OAS clawbacks, which apply in case your web revenue exceeds $90,997 in 2024. And you’ll have to repay 15 per cent of the surplus over this quantity to a most of the whole quantity of OAS acquired. Simply watch out that you simply don’t do one thing that can price you extra money in the long term.

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Don’t beat your self up about dividend investing. If, once you had been younger, you had been suggested that future dividends might end in OAS clawbacks, chances are you’ll not have the cash you will have in the present day. Dividend investing is a relatively simple inventory choice technique, making it well-liked with DIY traders. That, plus the truth that worth shares — typically dividend payers — have traditionally outperformed development shares.

At present, your shares are producing a gradual circulate of taxable dividends that you’re reporting in your tax return. Nonetheless, it’s essential to report the grossed-up (38 per cent) dividends, not the precise quantity of dividends acquired. For instance, in the event you obtain $100,000 in dividends, you report $138,000, which is the quantity used to evaluate OAS clawbacks. After the clawback evaluation, the dividend tax credit score is utilized, bringing down your taxable revenue.

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Dividends are one tax difficulty in a non-registered account. Capital positive factors, that are the distinction between the e-book and market worth of an asset resembling shares or funding actual property, are the opposite tax difficulty, and they’ll additionally influence your OAS eligibility.

The problem with holding particular person shares in a non-registered account is the tax drag (the discount in potential revenue or development because of taxes on funding positive factors) created by dividends and capital positive factors when buying and selling shares.

My guess is you’re pondering of switching to index funds as a result of they are usually extra tax environment friendly, are longer-term holds and, in keeping with the SPIVA reviews — which evaluate returns from energetic fairness and fixed-income mutual funds and their benchmarks — usually tend to outperform managed portfolios.

In terms of RRIFs, I typically counsel to folks beginning retirement not to attract greater than wanted except the surplus goes into one other tax shelter resembling a TFSA. The rationale for that is due to the tax drag I described above.

If you happen to draw extra cash out of your RRIF, you pay tax and have much less cash to reinvest. In your case, Tim, that quantities to about 40 per cent much less or much more, relying on the quantity you draw out of your RRIF. You might be additionally topic to the tax drag of dividends and capital positive factors once you spend money on a non-registered account.

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Having mentioned that, as you draw nearer to the tip of your life, there’s a tipping level when it begins to make sense to attract out of your RRIF and spend money on a non-registered account. Within the 12 months of your loss of life, your marginal tax charge (in Ontario) shall be 53.53 per cent. If you happen to can draw cash out of your RRIF at a decrease tax charge within the 12 months previous to your loss of life, that’s higher than leaving all of it to the tip when it’s taxed at the next charge.

Similar to the youthful retiree withdrawing extra from their RRIF, you’re nonetheless confronted with much less cash to speculate and a tax drag. The distinction, utilizing the instance above, is that there’s just one 12 months of the tax drag, and in the event you had left the cash within the RRIF, just one 12 months for the tax-deferred development to make up for the bigger tax charge within the last 12 months.

I used to be curious to see what would occur in the event you withdrew all of your RRIF cash now at age 83, or sufficient annually to deplete it by age 90, in comparison with leaving all of it till age 90. I discovered that in each circumstances, utilizing age 83 as your tipping level, you’re higher off not withdrawing extra cash out of your RRIF.

There may be, nevertheless, a bonus in the event you withdraw cash out of your RRIF and present it to your youngsters. I discovered the most important acquire, as measured by the whole wealth switch to your youngsters, got here once you withdrew the whole lot out of your RRIF in a single shot quite than depleting it over seven years. After all, the whole acquire will rely on what and the way your youngsters make investments the cash.

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Have you considered charitable contributions? Together with extra RRIF withdrawals, or by itself, you might donate a few of your shares with massive capital positive factors to a charity. By doing this, you keep away from the capital positive factors tax, thereby providing you with extra money to speculate and a bigger charitable tax credit score.

Tim, with the belongings you will have, I don’t see you escaping the OAS clawback except you maybe withdraw the whole lot out of your RRIF now and donate all of your non-registered investments to a charity. If it makes you are feeling any higher, it’s the after-tax OAS quantity you aren’t receiving.

Allan Norman, M.Sc., CFP, CIM, offers fee-only licensed monetary planning providers and insurance coverage merchandise by Atlantis Monetary Inc. and offers funding advisory providers by Aligned Capital Companions Inc., which is regulated by the Canadian Investment Regulatory Organization. Allan will be reached at alnorman@atlantisfinancial.ca.

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