How do I keep away from Previous Age Safety clawbacks resulting from 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 shedding my Previous Age Safety (OAS) resulting from 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 yr and cashing in my shares for index funds so I can acquire 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 yr, and my spouse has $490,000 in a RIFF. We have now 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 identify with an revenue of $9,000 per yr. — Tim

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FP Solutions: You might be in a great spot, Tim, and it’s sensible to consider easy methods to decrease your taxable revenue to scale back OAS clawbacks, which apply in case your internet 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 entire 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, if 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 might have immediately. Dividend investing is a relatively simple inventory choice technique, making it well-liked with DIY buyers. That, plus the truth that worth shares — typically dividend payers — have traditionally outperformed development shares.

At this time, your shares are producing a gentle circulate of taxable dividends that you’re reporting in your tax return. Nonetheless, you need to report the grossed-up (38 per cent) dividends, not the precise quantity of dividends acquired. For instance, in case 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 challenge in a non-registered account. Capital positive aspects, that are the distinction between the ebook and market worth of an asset similar to shares or funding actual property, are the opposite tax challenge, and they’ll additionally affect 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 resulting from taxes on funding positive aspects) created by dividends and capital positive aspects when buying and selling shares.

My guess is you might be considering of switching to index funds as a result of they are usually extra tax environment friendly, are longer-term holds and, based on the SPIVA experiences — which examine returns from energetic fairness and fixed-income mutual funds and their benchmarks — usually tend to outperform managed portfolios.

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

In the event 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 positive aspects if 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 yr of your dying, your marginal tax price (in Ontario) will probably be 53.53 per cent. In the event you can draw cash out of your RRIF at a decrease tax price within the yr previous to your dying, that’s higher than leaving all of it to the top when it’s taxed at a better price.

Identical to the youthful retiree withdrawing extra from their RRIF, you might be nonetheless confronted with much less cash to speculate and a tax drag. The distinction, utilizing the instance above, is that there’s just one yr of the tax drag, and in case you had left the cash within the RRIF, just one yr for the tax-deferred development to make up for the bigger tax price within the closing yr.

I used to be curious to see what would occur in case you withdrew all of your RRIF cash now at age 83, or sufficient every year 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 might be higher off not withdrawing extra cash out of your RRIF.

There may be, nonetheless, a bonus in case you withdraw cash out of your RRIF and reward it to your kids. I discovered the most important achieve, as measured by the entire wealth switch to your kids, got here if you withdrew all the pieces out of your RRIF in a single shot moderately than depleting it over seven years. After all, the entire achieve will rely on what and the way your kids make investments the cash.

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

Tim, with the property you might have, I don’t see you escaping the OAS clawback until you maybe withdraw all the pieces 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, gives fee-only licensed monetary planning companies and insurance coverage merchandise via Atlantis Monetary Inc. and gives 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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