cashing out defined pension contributions
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Thread: cashing out defined pension contributions

  1. #1
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    cashing out defined pension contributions

    Hi,

    I would appreciate your assistance in understanding the best option for me given the following circumstances;

    I was employed on a contract basis with an employer who offered a defined pension benefit for contracted employees. When my contract ended, I was given an option to cash out on the PV of my pension contributions of approximately $22,400 or to transfer a tax-exempt portion of the pension of approximately $15,500 to an RRSP while the remainder should be withdrawn in cash and subject to tax deduction. I was incorrectly told by the pension advisor that the cash withdrawal is subject to the same tax brackets of employment income so I elected a cash withdrawal on the entire amount as it is within the lowest tax bracket per my understanding. Upon withdrawal, 30% was withheld and it was treated as an RRSP withdrawal and I cashed only $16,680. The withdrawal took place in April 2016 and I currently have approximately $12,500 in my RRSP room. I have worked by the end of the year but my total earnings until year end were quite low $14,200.

    My question is if I fill in schedule 7 within the first two months of 2017, can I put back the withdrawn amount of $16,680 on a tax-free basis to my RRSP and get a full refund for the difference (at time of filing my taxes), that were the taxes withheld? Or I will only be able to put back the tax exempt portion of $15,500 and get the full taxes withheld back when I file my taxes? The other thing to consider is my contribution room, should I put back only up to my current RRSP room of 12,500?

    Also, are there any implications on my current RRSP room with any of those options? From a tax planning perspective, will I actually be better off with the current situation as I will get a refund anyways for the difference of 30%- 15% given my current income level, when I file my taxesl?

    Thank you very much and would appreciate your assistance in understanding the best option given my circumstances and the situation I'm in.

    Regards,
    moneywise_2017


  2. #2
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    I Did not know you could take money out of RRSP then put it back in without using up new contribution room.

    If next year you only make 14,200 I would not put any in RRSP, TFSA better

  3. #3
    Senior Member stardancer's Avatar
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    Quote Originally Posted by moneywise_2017 View Post
    Hi,

    I would appreciate your assistance in understanding the best option for me given the following circumstances;

    I was employed on a contract basis with an employer who offered a defined pension benefit for contracted employees. When my contract ended, I was given an option to cash out on the PV of my pension contributions of approximately $22,400 or to transfer a tax-exempt portion of the pension of approximately $15,500 to an RRSP while the remainder should be withdrawn in cash and subject to tax deduction. I was incorrectly told by the pension advisor that the cash withdrawal is subject to the same tax brackets of employment income so I elected a cash withdrawal on the entire amount as it is within the lowest tax bracket per my understanding. Upon withdrawal, 30% was withheld and it was treated as an RRSP withdrawal and I cashed only $16,680. Financial institutions are required by law to withhold a certain percentage as withholding tax on any 'rrsp' withdrawal or pension cash-out, although 30% seems high on the amount you state. The final tax owing or refunded is then worked out on the income tax return in April. At any rate, it is considered income and is included in the tax calculation.

    The withdrawal took place in April 2016 and I currently have approximately $12,500 in my RRSP room. I have worked by the end of the year but my total earnings until year end were quite low $14,200.

    My question is if I fill in schedule 7 within the first two months of 2017, can I put back the withdrawn amount of $16,680 on a tax-free basis to my RRSP and get a full refund for the difference (at time of filing my taxes), that were the taxes withheld? You can make an RRSP contribution of $12,500 as you state that is your contribution room. This will bring down your taxable income for the year. You cannot re-designate the $16,680+ that you withdrew in cash as a transfer to your RRSP

    Or I will only be able to put back the tax exempt portion of $15,500 and get the full taxes withheld back when I file my taxes? The other thing to consider is my contribution room, should I put back only up to my current RRSP room of 12,500? No, you have already withdrawn the $$; you cannot now change your mind. Any tax exempt transfer must be done from employer to institution directly without any money touching your hands. So you would only be allowed to make a new contribution of $12,500

    Also, are there any implications on my current RRSP room with any of those options? If you contribute to your RRSP, you use up your contribution room. If you don't, you carry that room forward. As stated above, you are only allowed to contribute up to your contribution limit of $12,500. If you contribute more than that, it will be an over-contribution and you will be penalized


    From a tax planning perspective, will I actually be better off with the current situation as I will get a refund anyways for the difference of 30%- 15% given my current income level, when I file my taxesl? It depends on what you want to do with the money. If you wanted it in your RRSP, why did you withdraw it instead of transferring it? If you need the cash as your earnings were low, then you will pay tax owing on your earnings and your withdrawal. If you have the cash and want to contribute to your RRSP, you will most likely get a refund; how much remains to be seen when you do your tax return in April. I suspect that you have more income to live on, other than employment, and that will also enter into the calculations

    Thank you very much and would appreciate your assistance in understanding the best option given my circumstances and the situation I'm in.

    Regards,
    moneywise_2017
    See bold

  4. #4
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    The tax brackets are the same. Your difference is related to withholding taxes, not the actual taxes owed on the money. That should probably have been explained to you but in any event, it is all too late now. You have lost the ability to transfer the pension without using personal contribution room. The upside is that the pension may have needed to go to a locked in RRSP and any new RRSP contributions will go into a non-locked in RRSP.

    Other then that, you have some money and you have some RRSP contribution room, so you can decide what to do with it. In addition, you now also have new RRSP contribution room of 18% of your 2016 earned income, that kicked in on January 1, 2017. Any contribution you make above $12,500 would need to be deducted in some other year then 2016, but if you wanted to, you could make a larger RRSP contribution.

  5. #5
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    ^^^^

    There is also potentially more good news.

    Assuming the "defined pension benefit" really is a "defined benefit pension" and is not a "defined contribution benefit", there will be a "pension adjustment reversal" that will give back some of the RRSP. It will give some additional RRSP contribution room once all the paperwork is registered with CRA.
    http://www.cra-arc.gc.ca/tx/rgstrd/p.../menu-eng.html
    http://www.advisor.ca/retirement/ret...tments-45085/2


    Cheers

  6. #6
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    30% is the correct withholding rate for RRSP withdrawals over $15,000. Otherwise, Stardancer is entirely correct. You made this error by taking the full $22.4K as a withdrawal, (less the withholding) instead of having part of it transferred to an RRSP. You don't get a "do-over". The amount of withholding tax isn't the source of the problem: it was your decision to withdraw it all, instead of taking the option of a tax-free transfer of nearly 3/4 of it.

  7. #7
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    Quote Originally Posted by moneywise_2017 View Post
    ... I was incorrectly told by the pension advisor that the cash withdrawal is subject to the same tax brackets of employment income so I elected a cash withdrawal on the entire amount as it is within the lowest tax bracket per my understanding.
    The more I read your OP the less sense it makes to me. Did you think CRA would tax this payout as if you had no other income? It would be taxed after adding it to all your other income. That might or might not leave you in the same "tax bracket", but you don't get to have these particular dollars taxed separately at the lowest rate.

  8. #8
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    Quote Originally Posted by OhGreatGuru View Post
    30% is the correct withholding rate for RRSP withdrawals over $15,000.
    Agreed ... http://www.taxtips.ca/rrsp/withholdingtax.htm


    Quote Originally Posted by OhGreatGuru View Post
    You made this error by taking the full $22.4K as a withdrawal, (less the withholding) instead of having part of it transferred to an RRSP. You don't get a "do-over". The amount of withholding tax isn't the source of the problem: it was your decision to withdraw it all ...
    Do we have enough information to be sure it is an "error"?

    The OP is thinking that because the withholding tax is 30%, it is an error.


    Without knowing total 2016 income, it seems clear that the tax rate is likely low ... when the 2016 tax return adjusts for the 30% withholding tax on the RRSP withdrawal plus any employment withholding tax.


    All we know for sure is that the RRSP withdrawal of $22,400 plus the estimated 2016 employment income of $14,200 there is at least $36,600 of income. If there are no other sources of income such as investments - while I have not checked every province/territory for their 2016 tax rates, I have not found any that $36,600 would bump the OP into having some income at the second lowest tax rate.

    Using Ontario as an example, the lowest tax level is the first $41,536 income at 20.05%. Assuming no other income, the OP should be getting a tax refund on the $22,400 of a bit under 10%, with $4936 room to spare before the second lowest tax rate is applied to the next dollar of income.
    http://www.taxtips.ca/taxrates/on.htm

    Even if there is enough to bump the OP into $41,436 at the lowest rate and another $2K at 24.15% .... if the OP was putting money in when they would have been paying a significantly higher tax rate - should that matter?


    It looks to me that despite the 30% withholding tax causing the OP to question the withdrawal, there is a good chance the pension advisor was either bang on or so close, it does not matter much.


    moneywise_2017:

    What province/territory are you in tax wise?
    Do you have any other sources of taxable income?
    Why do you think you are in a 15% tax range when most listings I have seen peg the bottom tax ranger at 20% to 25%? (Or are you looking at one level of taxes while ignoring the other, like looking at Federal tax rates without including provincial ones?)
    Do you know approximately what taxes would have been charged on the pension contributions if they were income?


    Cheers
    Last edited by Eclectic12; 2017-01-03 at 11:37 AM.

  9. #9
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    Quote Originally Posted by Eclectic12 View Post

    Do we have enough information to be sure it is an "error"?

    The OP is thinking that because the withholding tax is 30%, it is an error.

    By "error" I meant an error in judgement. From OP:
    When my contract ended, I was given an option to cash out on the PV of my pension contributions of approximately $22,400 or to transfer a tax-exempt portion of the pension of approximately $15,500 to an RRSP while the remainder should be withdrawn in cash and subject to tax deduction.

    If OP had transferred the $15,5K to an RRSP, it would have had no tax withholding, and would not have affected his RRSP room. The balance of ($22.4K - $15.5K = $6.9K) would have had a withholding tax of only 20%.

    There may have been some misunderstanding with the pay office about how much the withholding tax would be; but the actual tax bill will be based on his total income when he files his income tax return for 2016. If he overpaid, he will get refund. Yes, he could now contribute some of it to his RRSP using his current RRSP room to save some tax. But he could have avoided this by electing for the transfer.
    Last edited by OhGreatGuru; 2017-01-03 at 06:07 PM.

  10. #10
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    Thank you everyone for your helpful input, much appreciated!

    I was resident in Ontario for the year 2016. Apparently, I wasn't taking into consideration the provincial tax as well and again thought that I would be only paying the Federal tax on this type of "income". Assuming that I will take the pension reversal option and ended up with enough room to re-contribute the same amount I originally withdrew, and within the time frame to apply the deduction to my 2016 tax return (first two months), will the net effect be zero for me? meaning it will be as if I have transferred them on a tax-free basis or there would be other issues to consider as well?

    I made this decision because at the time I became unemployed, I was not sure when I will find a job again and wanted to avoid putting the money in the RRSP and withdrawing it, as I thought that the money transferred would be deducted from my current contribution room (is this a correct understanding?) and I would lose it altogether if I needed to do a withdrawal.

    Additionally, it's my first time to withdraw any pension funds and I relied on the information given for me, inadvertently thinking that I will be only taxed on the lowest federal tax bracket given the low amount. However, I feel that that the taxes that I overpaid was too much since this money was supposed to be part of my retirement benefit had I gotten renewed or became a permanent employee.

    I wished I knew about this forum at the time. Anyways, it is a lesson learned.

    Thanks again,
    moneywise_2017


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