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rob carrick

Tax-free savings accounts can do something that decades of complaining seniors have been unable to accomplish.

Deploy a TFSA properly today and you can reduce the OAS clawback or put it to rest entirely when you retire years from now. No more worrying about this annoying but actually inconsequential measure that's meant to conserve the Old Age Security benefit for people who really need it.

For 2013, the government starts clawing back OAS benefits when your net income exceeds $70,954. "That's a healthy income in retirement," said Jason Watt, an Edmonton-based trainer of financial advisers.

"I like to joke that, at that level, you're not eating cat food." OAS benefits are completely offset by the clawback with an income of $114,640.

Human Resources Social Development Canada issued some figures a few years ago showing just 5 per cent of Canadians were affected by the clawback, and that 2 per cent lost their benefit entirely.

Moreover, the clawback is equivalent to just 15 per cent of the amount by which your net income exceeds $70,954.

Mr. Watt said income taxes take a much bigger bite than that.

And yet, the clawback has rankled seniors ever since it was introduced in 1989 for people with net income over $50,000. The clawback was indexed in 2000 so that the threshold where it applies rises at the inflation rate each year, but seniors still feel ripped off.

In part, that's a result of a misunderstanding how OAS works. It's not like the Canada Pension Plan, where workers and their employers actually put money into the plan. OAS is funded out of general tax revenues, which means it's supported by all taxpayers.

One answer to the clawback is to make peace with it.

Maybe it will help to know that the average after-tax income for families where the major income earner is 65 or older was $56,200 in 2010, the most recent year for which there are data.

To repeat: If you're in clawback territory, you're in good shape.

Another way to deal with the clawback is to use TFSAs to render it irrelevant. Some quick background: Unlike withdrawals from registered retirement savings plans and registered retirement income funds, money taken out of TFSAs is not considered taxable income.

Partner an RRSP and a TFSA as retirement savings vehicles and you could end up with actual income that is significantly higher than the taxable income relevant to both your tax rate and the OAS clawback threshold.

TFSAs were introduced in 2009 and the original $5,000 contribution limit was just this year bumped up to $5,500.

Mr. Watt says a couple retiring today has $51,000 in contribution room, which would have only a modest effect on their ability to fend off the clawback.

"When we get to 10 or 15 years down the road and couples are retiring with $100,000 or $200,000 in their TFSAs, then it's going to change things," he said.

"And for a young client, if you're mixing TFSAs and RRSPs properly, then you're controlling your income so nicely that the clawback becomes almost irrelevant."

A simple rule for weighing retirement savings vehicles: Compare your current tax rate with your anticipated rate in retirement. If you expect your current tax rate to be higher, that argues for using RRSPs over TFSAs. Some people may prefer RRSPs because of the tax refund they get when they make a contribution, even though they'll pay tax when money is withdrawn in retirement.

With TFSAs, you contribute after-tax dollars and thus have no worries about your withdrawals being dinged by the taxman.

Still not sure about RRSPs and TFSAs for retirement?

Mr. Watt suggests you consider the flexibility of TFSAs, which are not bound by the annual minimum withdrawal requirements that apply to RRIFs.

RRIF-holders complain about these withdrawals almost as much as the clawback, and in this case they have a fair point.

They may end up taking money out of their RRIF to satisfy the withdrawal rules, thereby triggering the clawback. With a TFSA, you withdraw what you want, when you want. Whereas withdrawals from a RRIF have to be carefully arranged with the investment firm where it's held, TFSA withdrawals can be done online as a basic electronic transfer from one account to another.

The TFSA: no muss, no fuss and potentially no clawback. Give it some thought.

OAS by the numbers


Maximum monthly payment in 2013


Average payment in 2012


Net income threshold after which OAS benefits start being clawed back


Percentage of net income exceeding $70,954 that is clawed back


Income level at which OAS benefits are entirely clawed back


Year the Old Age Security Act came into force


The original age when OAS became available


The eligibility age after a five-year phase-in that began in 1965

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