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The Globe and Mail

Think you're too wealthy for Old Age Security?

A report from the federal Task Force on Financial Literacy earlier this year said that roughly 160,000 eligible seniors do not receive Old Age Security (OAS) benefits. This represents almost $1-billion in benefits that are unclaimed. From our experience with clients, there is a lot more in OAS benefits that are left on the table than just the $1-billion.

Many Canadians believe that they are too wealthy to qualify for OAS, but with proper planning, maybe some or all of your (or your parent's) OAS would reappear.

The Core Facts on OAS

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• To qualify for a full OAS, you must have lived in Canada for 40 years since the age of 18.

• If you lived in Canada for between 10 and 40 years since age 18, you will qualify for a partial Old Age Security benefit.

• You become eligible at age 65.

• Maximum OAS for 2011 is $6,322.20 per person. This can add up substantially. If we assume a couple with a full OAS, 2 per cent indexing and growth of 5 per cent a year, this could add up to over $492,000 by age 85 if fully invested.

• Pensioners with an individual net income above $67,668 begin to lose some of their OAS. The full OAS pension is eliminated when a pensioner's net income is $109,764 or above. For example, if your income was $88,000, you would receive roughly half of your OAS.

Service Canada has a website that answers all OAS questions very well. If you think that you may not be able to qualify for some or all OAS benefits, be sure to review the following before deciding not to apply:

Three Ways to Maximize OAS

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If a 65-year-old husband and wife have no corporate pensions and collectively receive $20,000 in CPP benefits, they will need to have a combined income (including the CPP) of $135,336 before losing any OAS! For retirees, this is a lot of income.

Let's assume this couple believe they are wealthy and will not likely qualify for OAS. If this couple had $1-million in combined RSPs and $1-million in non-registered investments, and the non-registered investments generated 4 per cent yield (half interest and half dividends), then they would have $40,000 in income (plus $20,000 in CPP income) if they drew nothing out of their RSPs.

Here are three ways that this couple can maximize OAS. Keep in mind that a full vs. no OAS could be worth several hundred thousand dollars for the couple.

1) They could choose to draw out about $60,000 from their combined RSPs before it would affect their OAS. While this would generate taxes from RSP withdrawals, these taxes would fall well below maximum tax rates, and would allow the couple to draw out less when they are forced to draw funds out of their RRIF when they are 72. If they didn't draw any RSP assets until 72, and we assume the assets grow to $1.3-million by then, they will each be forced to draw over $48,000, most likely at a higher tax rate and with some reduction in OAS for many years to come. If they consistently draw about $60,000 from age 65 to 71, then they will likely not have to draw much higher when they reach their RIF minimum withdrawal age.

2) They could manage their non-registered assets effectively to reduce unnecessary income. This couple could focus all of their high-yielding investments in their RSP, and leave lower-yielding investments (or investments with no yield) for their taxable account. They also need to be aware of dividend income as it is grossed up for tax purposes, and this grossed up income is what is used to determine whether you qualify for OAS. One day the government will address this unfair ruling, but until they do, it should be noted.

3) They could possibly use an investment that is tax-preferred or tax-sheltered for some non-registered assets. An example might be an annuity that pays out some interest, but largely return of capital. Another might be to find a REIT that still generates yield that is largely considered return of capital. Another might be to invest within a universal life insurance policy to shelter income. There are some creative ways to get access to these funds over time, while reducing your taxable income below OAS thresholds.

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The key point to this exercise is that the OAS plays a big part in retirement income for many Canadians. It is something that needs to be better understood, and in many cases can be managed to produce a real boost to income. You don't want to let the tail wag the dog, and have the OAS drive all of your decisions, but it is an important factor that should not be ignored.

Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.

Follow Ted on his blog at The Canadian Financial Planner.

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