Canadians: How to Invest to Avoid the OAS Clawback

Canadians can avoid the OAS clawback by utilizing their TFSA and generating income with stocks like Timbercreek Financial Corp. (TSX:TF).

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Old Age Security (OAS) is a universal retirement pension that is made available to most residents and citizens of Canada who have reached the age of 65. Like the Canada Pension Plan (CPP), the OAS has been reshaped according to the needs of Canadian citizens. Today, I want to discuss how Canadians can look to avoid an OAS clawback by tweaking their investment strategy. Let’s jump in.

How can Canadian retirees churn out income in 2023 and beyond?

The amount of your OAS benefit is dependent upon the number of years you have lived in Canada after you turn 18. You will typically receive a full pension if you have lived in Canada for at least 40 years after the age of 18. If you live in Canada for fewer than 40 years, you can still qualify for a partial pension.

In 2023, the maximum monthly OAS benefit stood at $687.56. That works out to a maximum annual benefit of $8,250.72. This can prove to be a great supplement to the rest of your income in retirement. However, investors should also be aware of the OAS clawback.

What is the OAS clawback, and how can you avoid it?

The OAS clawback is also known as the OAS Recovery Tax. This requires high-income retirees who are over the age of 65 to repay some or all of their OAS pension. In 2022, the OAS clawback starting threshold sat at an annual income of $81,761. Meanwhile, the maximum OAS clawback threshold was $133,141. Going by those same 2022 numbers, the monthly OAS clawback starts at $40.49 for an annual income of $85,000. At $140,000 in annual income, the OAS clawback will have eliminated your entire monthly payment.

So, how can you look to avoid the OAS clawback? Canadians who are nearing or in retirement should be utilizing the Tax-Free Savings Account (TFSA), without exception. This allows you to churn out capital gains and/or income completely tax free.

One of the ways to sidestep the OAS clawback is to rely on gains or income from your TFSA. OAS recovery taxes are solely based on taxable income. That means that the cash you withdraw from your TFSA will not count to your total income in any given year. Canadian seniors looking to employ this strategy should prioritize their TFSA to plan out withdrawals that could help you reduce or even eliminate your OAS clawback.

Here’s how you can generate huge income in retirement without the OAS

On the topic of the TFSA, older Canadian investors can gobble up tax-free income with high-yield monthly dividend stocks. Below are two of my favourite targets right now.

Timbercreek Financial (TSX:TF) is a Toronto-based mortgage investment company that provides shorter-duration structured financing solutions to commercial real estate investors in Canada. Shares of Timbercreek have dipped 3.4% month over month as of close on Monday, September 11. That has pushed the stock into negative territory so far in 2023.

Created with Highcharts 11.4.3Timbercreek Financial PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

Shares of this monthly dividend stock currently possess a very favourable price-to-earnings ratio of 9.6. Better yet, Timbercreek offers a monthly distribution of $0.058 per share. That represents a monster 9.6% yield. This is a great option for income generation in your TFSA in 2023.

Allied Properties REIT (TSX:AP.UN) is a Toronto-based real estate investment trust (REIT) that owns and operates distinctive urban workspace in major Canadian metropolitan areas. Its shares fell marginally in yesterday’s trading session.

This REIT is trading in attractive value territory compared to its industry peers. Moreover, the REIT last paid out a monthly dividend of $0.15 per share, which represents a superb 8.8% yield. Canadians aiming for big income generation in their TFSA should target this REIT. Whether or not this helps with your OAS clawback, you will enjoy the tax-free monthly dividends.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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