How do I keep away from Previous Age Safety clawbacks on account of excessive dividends?

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By Julie Cazzin with Allan Norman

Q: My spouse and I are 83 and 80, respectively, and I’m dropping my Previous Age Safety (OAS) on account of dividends and my registered retirement revenue fund (RRIF) withdrawals. I want after I was youthful that somebody had advised me dividends may very well be an issue as a retiree. I’m considering 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 financial 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. We’ve 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 you can reduce your taxable revenue to cut 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 just don’t do one thing that may value you extra money in the long term.

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Don’t beat your self up about dividend investing. If, once you have been younger, you have been suggested that future dividends could lead to OAS clawbacks, it’s possible you’ll not have the cash you may have as we speak. Dividend investing is a relatively straightforward inventory choice technique, making it standard 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 gentle move of taxable dividends that you’re reporting in your tax return. Nevertheless, you could report the grossed-up (38 per cent) dividends, not the precise quantity of dividends acquired. For instance, for those who 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 subject in a non-registered account. Capital good points, that are the distinction between the guide and market worth of an asset equivalent to shares or funding actual property, are the opposite tax subject, and they’re going to 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 on account of taxes on funding good points) created by dividends and capital good points when buying and selling shares.

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

In relation to RRIFs, I typically recommend to individuals beginning retirement not to attract greater than wanted until the surplus goes into one other tax shelter equivalent to a TFSA. The rationale for that is due to the tax drag I described above.

In case you 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 good points once you put money into a non-registered account.

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Having stated that, as you draw nearer to the top of your life, there’s a tipping level when it begins to make sense to attract out of your RRIF and put money into a non-registered account. Within the 12 months of your demise, your marginal tax price (in Ontario) will probably be 53.53 per cent. In case you can draw cash out of your RRIF at a decrease tax price within the 12 months previous to your demise, that’s higher than leaving all of it to the top when it’s taxed at a better price.

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 for those who had left the cash within the RRIF, just one 12 months for the tax-deferred development to make up for the bigger tax price within the last 12 months.

I used to be curious to see what would occur for those who 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’s, nevertheless, a bonus for those who withdraw cash out of your RRIF and reward 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 every thing 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 possibly can donate a few of your shares with giant capital good points to a charity. By doing this, you keep away from the capital good points tax, thereby providing you with extra money to speculate and a bigger charitable tax credit score.

Tim, with the belongings you may have, I don’t see you escaping the OAS clawback until you maybe withdraw every thing 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 companies and insurance coverage merchandise via Atlantis Monetary Inc. and offers funding advisory companies via Aligned Capital Companions Inc., which is regulated by the Canadian Funding Regulatory Group. Allan may be reached at alnorman@atlantisfinancial.ca.

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