# When to claim RRSP deduction



## argyll (May 6, 2012)

I'll try to make my situation as clear as possible :

In 2013 I worked a regular job earning 95k

On 31 Jan 2014 I will be quitting and taking out my pension funds to the tune of 400k (why we don't need to go into). 200k of that goes into a LIRA and 200k is in cash. This money will be coming in Feb 2014. 

I have 65k room in RRSPs. Am I better putting that money in against 2013 or 2014. I had assumed 2014 as my income will be higher that year (200k plus one month's salary versus 95k) but a financial planner friend is adamant that I should file it against 2013. Either he's not explaining why well enough or I'm too dumb to understand !


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## Eclectic12 (Oct 20, 2010)

Is there something you are leaving out?


Usually when one is transferring to a LIRA, it's because the money is coming from a pension plan. The one time when I was transferring a pension and was offered cash, it was something under 30% of the total amount, where the rest had to be locked in until retirement (either by staying in the plan or transferring to a LIRA or purchasing an annuitiy). 

So I'm not sure how you can have $400K coming from a pension and be able to take $200K as income, in cash, unless one is of a retirement age. 


Based on $200K of income plus one month's salary - I'd expect 2014 to be the better option but want to confirm that $200K withdrawal is possible.

Cheers


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## argyll (May 6, 2012)

Hi there. Thank you for the reply. You are absolutely right that the money is coming from a pension plan - OMERS to be precise. They told me that $200k had to go to a LIRA and the rest would be paid out (with presumably some tax withholding).


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## Retired Peasant (Apr 22, 2013)

I would get more details from them. When I took my pension, it was offered as some to LIRA, some as cash, some as eligible for direct transfer to RRSP (over and above current year's limit). In any case, your decision isn't limited to 2013 or 2014. You can put it in, claim it (or any part of it) in future years - Carry forward is indefinite. Given that your income is higher in 2014, you can claim part of it then, saving the rest for a future high earnings year.


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## argyll (May 6, 2012)

Once again, many thanks for the replies. I obtained the details from OMERS and the amount is approx 403k in total, 202k having to go to LIRA and the rest available. Future offsets are not an issue for me as I will be travelling for the next 4 years earning effectively nothing. 

Sounds like my doubts as to my friend's advice are founded. It may be that I should split my RRSP claims, some in 2013 and some in 2014, to try to gain maximum relief by reducing my next income to the next lowest bracket. For that calculation I may have to break out some tables and a calculator. 

I'm hoping to not have to pay a tax accountant for what should be a simplish problem but I might be misunderstanding some complexities.


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## Eclectic12 (Oct 20, 2010)

Retired Peasant said:


> ... When I took my pension, it was offered as some to LIRA, some as cash, some as eligible for direct transfer to RRSP (over and above current year's limit) ...


My understanding is that the direct transfer to RRSP the contribution limit does not come into play as the money is changing accounts, similar to transferring an RRSP at bank A to one at bank B. The reduction of RRSP contribution room has already happened via the pension adjustment (PA) reducing the RRSP contribution room earned in the tax year the pension money was contributed.




Retired Peasant said:


> ... In any case, your decision isn't limited to 2013 or 2014. You can put it in, claim it (or any part of it) in future years - Carry forward is indefinite. Given that your income is higher in 2014, you can claim part of it then, saving the rest for a future high earnings year.


True ... though assuming a full $200K is paid as income - is there any point in delaying the deduction beyond 2014? 


Cheers


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## argyll (May 6, 2012)

The way I read it was that my LIRA was transferred to the LIRA account but the remainder was paid out in cash. The fact that I have RRSP room is just a bonus for me but it didn't have anything to do with OMERS.

I agree that this appears to be different from other times....before when I transferred my pension INTO OMERS I transferred the vast majority in, had to take out a small locked-in RRSP and got a small amount as cash.

But this time it seems as if it'll just be LIRA and cash......hence the question about whether to apply money that I move into RRSP in 2013 or 2014. But it seems like 2014 is the consensus.


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## MorningCoffee (May 8, 2013)

I was in a similar situation recently with some money going directly into a LIRA, the rest came as cash. I wasn't with Omers, but mine withheld taxes (as you were presuming yours would as well.) They withheld 30%.

Did your financial planner friend explain why 2013 was better? The only reason I could think is if you did (or will do) some kind of pension buyback that may offset the cash payout as a pension adjustment? 

If it's simply income of 95K in 2013 vs 200K in 2014, the choice seems obvious. I would get another explanation from your friend since his advice differs.


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## Retired Peasant (Apr 22, 2013)

Eclectic12 said:


> My understanding is that the direct transfer to RRSP the contribution limit does not come into play as the money is changing accounts, similar to transferring an RRSP at bank A to one at bank B. The reduction of RRSP contribution room has already happened via the pension adjustment (PA) reducing the RRSP contribution room earned in the tax year the pension money was contributed.


My memory is foggy as it was many years ago. But I think the 'eligible for transfer to rrsp part' was the unvested portion of the pension contributions.




Eclectic12 said:


> True ... though assuming a full $200K is paid as income - is there any point in delaying the deduction beyond 2014?


There might be if income in future years continues to be high; not enough details were given; I just put it out there as an option.


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## Eclectic12 (Oct 20, 2010)

Retired Peasant said:


> My memory is foggy as it was many years ago. But I think the 'eligible for transfer to rrsp part' was the unvested portion of the pension contributions.


Perhaps you have a link or some indication of province?

In Ontario, according to the Financial Services Commission of Ontario (FSCO), it is the employee that is not vested and means that when leaving:


> You should also be aware that you are not eligible to receive a refund of any of your employer's contributions, if you are not vested.


 
From the same link, there is the "50 Percent Cost Rule". 

It says that if an employee belonged to the a pension that they were required to contribute to and the employee contribution plus growth is found to be more than 50% (say 58%), then the 8% can be taken as income (& taxed while destroying RRSP contribution room) or transferred to an RRSP.

https://www.fsco.gov.on.ca/en/pensi...s/LE-Events-that-May-Affect-Your-Pension.html


Since my pension was governed by these rules, it was the 50% rule that provided the transfer option for me (which I used). 





Retired Peasant said:


> Eclectic12 said:
> 
> 
> > ... though assuming a full $200K is paid as income - is there any point in delaying the deduction beyond 2014?
> ...


The OP's income is jumping from $95K to $200K + one month's salary in 2014, where the $65K RRSP reduction against the $200K income is going to put the income in range of the lower tax bracket but not at it.
http://www.taxtips.ca/taxrates/on.htm

If the OP decides to take another job in 2015 and the tax brackets stay the same, it would take an income of over $136,270 to hit the same tax bracket and an income over $514,090 to have a higher tax bracket.

Other sources of income such investments IMO, are only going to make a stronger case for taking the smaller $65K RRSP deduction in 2014.


Then too - there will likely only be one month (Jan 2014) of pension contributions so the pension adjustment (PA) that reduces the RRSP contribution room will be smaller than normal while the income being used to calculate the 2014 RRSP contribution room will be doubled ... so that should result in a nice sized addition of RRSP contribution room earned in 2014.

Between these factors - I'm having trouble thinking of any reason to:

1) use the RRSP contribution in 2013 ( ... because the OP can make about another $40K in income before hitting the same tax level as 2014 income will hit using the withdrawal alone).

2) try save anything for future years. 



You are right that other details such as whether the OP is going to take time off from work in 2014, whether there is investment income or charitable donations etc. changing the situation that should be considered.

It's just that doubling one's income using the RRSP withdrawal is likely to dwarf these other factors ... unless the OP is doing something extreme like buying into a bunch Tim Hortons franchises so that future income will be over the $500K mark.


Cheers

*PS*

The part where OP says he is traveling for four years with almost no income also leans me towards claiming it. I'm thinking the refund from the second highest tax level is better than what "may" be the tax level five years from now.


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## Eclectic12 (Oct 20, 2010)

argyll said:


> The way I read it was that my LIRA was transferred to the LIRA account but the remainder was paid out in cash. The fact that I have RRSP room is just a bonus for me but it didn't have anything to do with OMERS ...
> 
> But this time it seems as if it'll just be LIRA and cash......hence the question about whether to apply money that I move into RRSP in 2013 or 2014. But it seems like 2014 is the consensus.


I agree that the $65K RRSP room is independent of OMERs.

The LIRA to a LIRA makes no sense to me .... you control a LIRA so I'm puzzled as to why a transfer would be needed.

If you'd moved the LIRA to OMERs, it should be part of the OMERs pension commuted value that is being transferred to an existing LIRA (if it's is governed by the same pension legislation) or a new LIRA if different pension legislation is involved.

This link for OMERs has the CV to LIRA as option #5:
http://www.omers.com/pension/Your_Options_When_Leaving.aspx

Option #6 does not seem to apply so I'm thinking the cash part is coming from the "50% Cost Rule" of:
https://www.fsco.gov.on.ca/en/pensi...s/LE-Events-that-May-Affect-Your-Pension.html


So I'm thinking that the "available" part is *your* choice as either a transfer to RRSP or paid as income.

This is important as if you plan to travel, transferring $200K from your pension into your RRSP tax free and being able to draw on it at a lower tax bracket that you control will be a _huge benefit_ compared to taking it as income in 2014 as one big huge income.

So I'd get this part settled about the options for the cash before anything else.


Returning to your original question about applying the RRSP contribution to which tax year - don't forget that if you make the RRSP contribution in the first six days of 2014, the deduction can be applied to either the 2013 or the 2014 tax year. So if it takes you a couple of weeks to figure out if there will be a 2014 income of $200K plus, that shouldn't stop you from contributing to your RRSP.


Cheers


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## argyll (May 6, 2012)

You are all being most helpful. Just for clarification: yes I am in Ontario, I do not intend to earn any income for the next 4 years, no I don't intend on buying any Tim Hortons franchises !

This is what my recently received report from OMERS said (the figures went up a wee bit):

"The estimated commuted value of your pension:
- Lump sum amount $419,824.20

Important Information:
The Income Tax Act (ITA) sets a variable factor to determine the limit on the amount you can tax shelter when 
you transfer the commuted value of your benefit. If you choose to transfer the commuted value, please note that 
you can only transfer approximately $210,619.26 to a LIRA. This amount is an "estimate" only and will be 
recalculated as of the day we pay it. Any commuted value amount over the limit will be sent to you in cash and 
income tax will be deducted."

So the plan was, using the easy 400k figure, to put 200k in the LIRA, 65k in RRSPs (in 2014), 31k (the limit, I think) in TFSAs and the rest as cash (tax to be paid on the cash amount plus the TFSA amount).


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## Retired Peasant (Apr 22, 2013)

Retired Peasant said:


> My memory is foggy as it was many years ago. But I think the 'eligible for transfer to rrsp part' was the unvested portion of the pension contributions.





Eclectic12 said:


> Perhaps you have a link or some indication of province?
> 
> From the same link, there is the "50 Percent Cost Rule".
> 
> Since my pension was governed by these rules, it was the 50% rule that provided the transfer option for me (which I used).


Sorry, you are right; it was the refund of excess contributions that I transferred to RRSP. Like I said, foggy memory from 15+ years ago. (shoulda kept out of the conversation).


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