Defined Contribution Plan - tax implications at retirement age
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Thread: Defined Contribution Plan - tax implications at retirement age

  1. #1
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    Defined Contribution Plan - tax implications at retirement age

    Question - Does the following statement apply to both DBPP(s) and DCPP(s):

    "The Income Tax Act imposes a limit on the amount of money that may be transferred on a tax-sheltered basis to a LIRA, LIF or LRIF. Money exceeding this limit must be paid to you in a non-locked-in form, such as cash."

    If so, is there any way to transfer the full amount to an income-generating investment, without getting taxed on the initial transfer? Life Annuity???

    I have a feeling that I'm mis-understanding something about DCPP(s). My company recently announced that our DBPP will be converted to a DCPP in 3 years. I'm just trying to understand the tax implications of a DCPP at retirement. With my DBPP I would have seen about $250,000 that would have been taxed, with the rest in a tax-shelter investment.


    Above quote taken from:
    http://www.song.on.ca/files/pensioninformation.pdf


  2. #2
    Senior Member MoneyGal's Avatar
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    You are not going to need to transfer your DB pension anywhere. Your company is no longer going to offer DB plans to new hires, and they and you will not be able to make any more contributions to the existing DB plan (and they will implement a DC plan for new hires and current staff on the conversion date). BUT! your DB pension will remain intact and you will still, if you choose, receive a DB pension in retirement.

    As for your DC pension contributions - these are much more like an RRSP.

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    Quote Originally Posted by MoneyGal View Post
    You are not going to need to transfer your DB pension anywhere. Your company is no longer going to offer DB plans to new hires, and they and you will not be able to make any more contributions to the existing DB plan (and they will implement a DC plan for new hires and current staff on the conversion date). BUT! your DB pension will remain intact and you will still, if you choose, receive a DB pension in retirement.

    As for your DC pension contributions - these are much more like an RRSP.
    My post was probably not very clear. Actually I didn't mean the transfer from my DBPP to the DCPP in 3 years. I was only referring to when I reach my retirement date and need to transfer the DCPP funds to an investment generating vehicle. Am I able to transfer 100% of the funds without a portion having to be issued as a non-locked in, taxable amount?

    I have to do a bit more research to understand what you mean when you say the DC pension contributions are similar to an RRSP. Undoubtedly there are rules on min and maximum withdrawals over 'x' amount of years. I'll do some more reading

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    Senior Member Daniel A.'s Avatar
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    Yes you will be able to transfer 100% from a DC plan your DC is locked in.

    In the DC you assume all the risk same in an RRSP.
    You do enjoy lower management fee's than an RRSP, the down side is your limited in terms of not having a say as to which company manages the funds and can only go into a basket with normally 5-7 choices of mutual funds, no stock picking.

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    Quote Originally Posted by Daniel A. View Post
    Yes you will be able to transfer 100% from a DC plan your DC is locked in.

    In the DC you assume all the risk same in an RRSP.
    You do enjoy lower management fee's than an RRSP, the down side is your limited in terms of not having a say as to which company manages the funds and can only go into a basket with normally 5-7 choices of mutual funds, no stock picking.
    Thanks Daniel. That's the conclusion I came to last night as well. That makes it very tempting to move my DB amount into the DCPP, rather than leave it as a locked-in DB till retirement. There would have been a huge tax bill due at retirement if I had taken it out as a lump-sum ... which I had been considering. Now I will be able to effectively move the money to income-producing investments without the tax-hit. Fantastic!!! [btw, I'm sure it's not quite that simply ... still have more reading to do about LIRA, LIF, LRIF, etc].

    Having said that, I'm not exactly happy that I end up with all the market-risk. I have 8 years left to early-retirement, or 18 years to my normal retirement date. I'm just hoping that the markets have a decent run-up in the last 5 years before I retire

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    Do you have to move the DB into the DC plan. The reason the company is suggesting this change is because the DB is better for you and more risky to them and the DC is the reverse, in almost all cases.

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    Quote Originally Posted by OptsyEagle View Post
    Do you have to move the DB into the DC plan. The reason the company is suggesting this change is because the DB is better for you and more risky to them and the DC is the reverse, in almost all cases.
    No. I have the option of moving it, or leaving it in the DB. The company is not suggesting this over the other option. I'm just looking at the tax benefit vs associated risks with DC plans.

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    Senior Member Daniel A.'s Avatar
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    IMHO I would not transfer the DB it offers a set payout, the employer assumes all the risk and even if under funded today is still safer.
    If you are required to switch and have the DC in the future no longer allowed to carry on in the DB leave it parked.

    I assume your 47 years old, in the nineties when the choice was offered by my company to switch from DB to DC the first thing the advisers said was anyone over 45 should not consider switching, the growth curve in the DB changes dramatically in the final ten years. The cost of funding the DB for the company is huge, if you transfer the DB to the DC your handing the company a gift that you won't recover ever.

    Being forced to switch late in the game is not to your benefit and you would have done far better continuing in the DB till retirement.
    At the time my company offered the choice we received software with the package for modeling trending.
    Switching would have met the company would no longer be on the hook putting 40,000.00 a year into my plan in the last eight or ten years, instead they would have been putting around 8,000.00 per year into the DC .
    The only thing you get is the Pension adjustment that is minor compared to what you give up.

    A good book to read is Retirement Heist by Ellen E. Schultz one of the best books on the topic.

  9. #9
    Senior Member MoneyGal's Avatar
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    Quote Originally Posted by mind_business View Post
    Thanks Daniel. That's the conclusion I came to last night as well. That makes it very tempting to move my DB amount into the DCPP, rather than leave it as a locked-in DB till retirement. There would have been a huge tax bill due at retirement if I had taken it out as a lump-sum ... which I had been considering. Now I will be able to effectively move the money to income-producing investments without the tax-hit. Fantastic!!! [btw, I'm sure it's not quite that simply ... still have more reading to do about LIRA, LIF, LRIF, etc].

    Having said that, I'm not exactly happy that I end up with all the market-risk. I have 8 years left to early-retirement, or 18 years to my normal retirement date. I'm just hoping that the markets have a decent run-up in the last 5 years before I retire
    You aren't reading Daniel's post correctly.

    Also. If the markets are poor in the 5 years before you plan to retire, what will you do? Live on less than you had planned? Delay your retirement?

  10. #10
    Senior Member Daniel A.'s Avatar
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    Thanks MoneyGal you clearly understand what I'm trying to say.

    I'm not a professional adviser and is why I recommend the book well written easy to understand.


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