Baby Boomers, who are now retired or close to it have always relied on the fact that they would receive Old Age Security benefits. For many, many years, the perception has been that when a person turns 65 these benefits automatically kick in. It is no longer just the age that is considered as the start date as retirees now face choices as to when they want Old Age Security benefits to commence.
For the past four years, Canadians have been able to defer Old Age Security benefits for months or even years past the age of 65. It can be a confusing time because any decision made to defer these payments is irreversible. Speaking with a Kelowna tax accountant will help you decide if waiting to receive OAS is a good option for you.
Under the current rules, you can wait for up to 5 years to receive benefits. The amount of the benefit increases by 0.6% per month the payments have been deferred. Therefore, if you were to defer the benefit for the full 5 years, the monthly payment you would eventually receive is increased by 36%. Again, your Kelowna tax accountant, Kerr & Company, is qualified to discuss your options as the choice to defer or not defer is a personal decision and varies from person to person.
As you’re probably aware, the federal government offers two programs which provide income to Canadians during the retirement years: the Canada Pension Plan (CPP) and Old Age Security (OAS).
Canadians fund CPP by making contributions throughout their working lives.
OAS is a non-contributory plan in which benefits are paid by the federal government.
Your eligibility for OAS benefits will be determined by your age and number of years you’ve resided in Canadian. If you’re 65 years old and have lived in Canada for a minimum of 40 years, after the age of 18, you will be eligible to receive maximum benefit. Furthermore, those born before July 1, 1952, and were residing in Canada on July 1, 1977, may also receive full benefits.
Kerr & Company, Kelowna tax accountants, follow some general considerations to help determine when OAS benefits should start:
1. Total income required
We first need to determine how much total income is required at the age of 65. Other sources of income such as CPP, an employer-sponsored pension plan, RRSPs and RRIFs will also be considered when determining how much income you need to meet both current and future financial needs.
2. Tax implications
Tax implications need to be addressed along with knowing income tax thresholds and cut-offs which tax accountants can help structure. The first federal tax bracket includes income up to $45,916 and taxes that income at 15%. The second bracket is taxed at 20.5%.
In 2017, the Canadian tax system provides a non-refundable tax credit of $7,225 for taxpayers over the age of 65 at the end of the tax year. That credit is reduced once the taxpayer’s net income for the year exceeds $36,430. The credit is NOT available to taxpayers with a net income over $84,597.
But, you may be able to receive a quarterly GST/HST refundable tax credit. The full credit is payable to individual taxpayers whose family net income is less than $36,429.
Kelowna tax accountants should also inform you of the “OAS recovery tax”. If you are receiving Old Age Security benefits and had an income over $73,756 in 2016, you are required to repay a portion of those benefits. OAS entitlement for that time period is entirely eliminated if income for 2016 was more than $119,615.
3. Sufficient Income for Lifestyle
You’ve worked hard your whole life and when retirement time comes, you should be able to finance a comfortable lifestyle. By determining the total income required and the tax implications you may face, Kelowna tax accountants can establish a sufficient income, help minimize taxes, potential loss of tax credits or the need to repay OAS.
You may be reaching the usual retirement age of 65 but it is becoming more and more common for Canadians to remain in the workforce, even part-time. If this is your wish, and your employment income finances your chosen lifestyle, you may want to postpone OAS.
4. Determine CPP Retirement Benefits
If you’ve worked in Canada your entire life, then you’ve likely paid into CPP and are eligible to receive benefits. These benefits can be received as early as age 60, however, these too can be deferred and start anytime before age 70.
Similarly to OAS, CPP benefits increase each month that they are postponed and those who are eligible for both should consult with Kelowna tax accountants.
5. Use RRSP Savings Efficiently
Many Canadians have saved for retirement through a private registered retirement savings plan (RRSP). There are options available to you regarding RRSPs as well. You can withdraw money from your RRSP at any age but you must collapse your RRSP by the end of the year of age 71 and start receiving income from those plans.
Options include converting the RRSP into a registered retirement income fund (RRIF) or purchasing an annuity. Income from the converted RRSP funds will start the following year. Those clients who have a significant amount of RRSP savings will have an additional taxable income for each year after they turn 71 and this may affect the start date in which you want to start receiving OAS.
As Kelowna tax accountants, our goal is to structure retirement income based on financial and tax considerations, however, we understand that every client is different. Personal preferences and your own life goals are extremely important. Health issues, the desire to travel early in retirement rather than later, a move to another country, and significant purchases can alter one’s plans and require more income sooner.
Knowing your options now will help ease concern. These options bring a level of flexibility that benefits your quality of living in retirement but these options can also increase complexity especially when individuals have multiple sources of income.
A retirement income calculator can be found here and provides, based on the information given, the amount of OAS payable at each age. When facing difficult financial and tax decisions, please don’t hesitate to contact Kerr & Company, your trusted Kelowna tax accountants.