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Thread: cashing out defined pension contributions

  1. #11
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    Quote Originally Posted by OhGreatGuru View Post
    By "error" I meant an error in judgement.
    That is where I think the OP is letting a temporary situation override the state goal.

    The OP said withdrawing at a low tax rate was the idea. When once compares the two choices with this in mind, they are more like plan 1A and plan 1B.

    Plan 1A ... which is what was done.
    All of the pension money has been withdrawn at or near the lowest tax level, with no RRSP withdrawal fees charged. The temporary setback is losing access to the extra 10% or so withholding tax (i.e. $2240) until the 2016 tax return refunds it.

    Plan 1B ... transfer the $15.5K to the RRSP, withdraw the remaining $6.9K that has a 20% withholding tax.
    Part of the pension money is withdrawn at or near the lowest tax level, withholding tax is in line with final tax and should the 2017 income also be low, the remainder can be withdrawn from the RRSP but potentially have an RRSP withdrawal fee as well as the withholding tax to pay in 2017.

    From the POV of "withdraw at a low rate" - I don't see either option as a bad choice.


    The place I see the most risk of a bad choice is to put more money back into the RRSP to get a 20% refund. A charitable donation that exceeds $200 is going to generate a credit at a higher rate than the RRSP.


    The tax credit for the first $200 of donations is at the lowest personal tax rate (except for Quebec, which uses 20%), and the tax credit for the amount over $200 is at the highest tax rate in 2016 for all provinces and territories except Alberta, New Brunswick and Ontario. Alberta has only one tax rate (10%) for calculating income taxes, but uses 21% as the rate for donations over $200. New Brunswick reduced their highest tax rate a few years ago, but did not reduce the rate used for donations over $200. Ontario increased their highest tax rate in 2012, and again in 2013, but still uses the 2011 highest tax rate for donations over $200.
    http://www.taxtips.ca/filing/donationstaxcredit.htm


    Unless I am missing something (or income is significantly higher than posted so far), IMO the only bad move is to re-contribute to the RRSP.


    Cheers


  2. #12
    Senior Member Beaver101's Avatar
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    Quote Originally Posted by moneywise_2017 View Post
    ... 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? ...
    ... don't hold your breath about getting that PAR calculation (soon even).
    Everyone should be respected as an individual, but no one idolized.-A. Einstein

  3. #13
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    Quote Originally Posted by moneywise_2017 View Post
    ... 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".
    If you are comfortable with computers, you can download the 2016 StudioTax software then plug in your numbers to be sure of the tax rates as well as what the end result (i.e. refund or taxes owing) will be.
    http://studiotax.com/en/


    Quote Originally Posted by moneywise_2017 View Post
    ... 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?
    If you mean tax wise for 2016 ... AFAICT you should be getting a refund of the extra 10% withholding tax *without making an RRSP contribution*. Putting some or all of the $$$ back into the RRSP may generate an additional refund but at the low tax rate.

    If you want to reduce an already low tax rate, as mentioned in post # 11, I believe a charitable donation is likely a better bang for your buck. If you think you will have a higher income level in the future, it may be better to save the RRSP contribution room for when income is higher - generating a higher amount of tax deferred.

    You can check this by installing StudioTax then setting up one return as-is (i.e. no RRSP contribution or charitable doantion), another return with an RRSP contribution and a third return with the charitable donation.


    Quote Originally Posted by moneywise_2017 View Post
    ... 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?
    No ... though it will be similar.

    The RRSP will have the same value as if the transfer had happened but you will have to use up RRSP contribution room for the $15.5K that a transfer would have avoided using up. Overall it means you have less RRSP contribution room going forward than you could have had.


    Quote Originally Posted by moneywise_2017 View Post
    ... 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.
    This is unfortunate ... (and means the choice to not transfer is an error - not the end of the world but an error). The point of the "transfer a tax-exempt portion of the pension of approximately $15,500" is that it does not use up RRSP contribution room. This is because when the contributions were made, you received the tax benefit on your pay cheque. Overall, while it is a gain to your individual RRSP - overall is a change of accounts.

    The part that would have needed RRSP contribution room is the taxable $6.9K.


    Quote Originally Posted by moneywise_2017 View Post
    ... Additionally, it's my first time to withdraw any pension funds ...
    The point of the tax free transfer is that it is not a withdrawal ... but that boat has already sailed.


    Quote Originally Posted by moneywise_2017 View Post
    ... 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 ...
    Unless there is income you haven't mentioned ... the 10% over payment is temporary. So while during 2016 you overpaid the tax, it will be refunded. The bottom line is that once the refund arrives *you will still end up paying the lowest Ontario tax rate level*.

    It might not be as early as you wanted and you may want to plan differently in the future but keep in mind the goal is still going to happen.


    Quote Originally Posted by moneywise_2017 View Post
    ... I wished I knew about this forum at the time. Anyways, it is a lesson learned.
    True .... I wished that as well for some of the investing info.


    My concern at this point is that you still seem to think that the higher tax rate is permanent instead of temporary. I'd suggest playing with StudioTax to fulling understand you choices and their impacts on your 2016 tax return. There is lots of time before the April 2017 when the tax return is due so make sure you are happy with the next move.


    BTW ... is the new job looking promising?


    Cheers
    Last edited by Eclectic12; 2017-01-05 at 11:36 AM. Reason: grammer

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  5. #14
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    Thanks Eclectic and everyone for helping me to better understand my tax situation. The current job is promising and hopefully it lasts...

    Best,
    moneywise_2017


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