# Buying Back Pension Question



## ButaneProphet (Feb 15, 2011)

Hi guys, I have a question that someone may be able to help me with. 

I am looking at buying back 14 months of time/pension in the OPSEU Pension Trust for time I spent on contract with the Ministry of Finance. When you buy back time you have an option to transfer the funds from a tax sheltered source such as an RRSP. Would I have to pay tax on the the money when transferring it from an RRSP to the OPT? This is a big chunk of change for me, could be up to $15,000. I am wondering if it would be wise to put the money into an RRSP then use it to buy the time, if I didn't have to pay tax on it then I would at least have the refund to offset some of the cost of the buyback. I have no RRSP's at the present time and lots of unused room. 

Interesting trivia: I could have bought the same 14 months in 1998 for $2200, my ex wife was spending money faster than I could make it so it wasn't an option.


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## Eclectic12 (Oct 20, 2010)

ButaneProphet said:


> Hi guys, I have a question that someone may be able to help me with.
> 
> I am looking at buying back 14 months of time/pension in the OPSEU Pension Trust for time I spent on contract with the Ministry of Finance. When you buy back time you have an option to transfer the funds from a tax sheltered source such as an RRSP. Would I have to pay tax on the the money when transferring it from an RRSP to the OPT? This is a big chunk of change for me, could be up to $15,000. I am wondering if it would be wise to put the money into an RRSP then use it to buy the time, if I didn't have to pay tax on it then I would at least have the refund to offset some of the cost of the buyback. I have no RRSP's at the present time and lots of unused room.
> 
> Interesting trivia: I could have bought the same 14 months in 1998 for $2200, my ex wife was spending money faster than I could make it so it wasn't an option.


Both the RRSP and OPSEU Pension trust are tax sheltered so when it should not be taxed. When I joined my current company, I had the option to transfer my db lump sum from the previous employer's plan into the new one, which is similar to the RRSP to OPSEU - also tax free.

There may be a "tax event" as likely the OPSEU plan is a db plan so the buy-back, no matter how it is funded will increase the pension adjustment (PA) what will reduce the RRSP contribution room earned for future use. Note that in a db plan, the benefit is guaranteed so that for a $3 contribution, the PA will be something like $15. The RRSP room earned is reduced by the $15 PA. So it is good that the RRSP room already exists.

Contributing to the RRSP and funding the buyback that way sounds good. Though if you expect to be in a higher tax bracket in the near future, you may want to save the tax deduction for when this happens.


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## OhGreatGuru (May 24, 2009)

ButaneProphet said:


> ... When you buy back time you have an option to transfer the funds from a tax sheltered source such as an RRSP. Would I have to pay tax on the the money when transferring it from an RRSP to the OPT? ...


No.

But whenever you see "transfer funds from/to an RRSP", they don't mean you take it out, walk it down the street, and re-deposit it in another plan. The transfer has to be done by the financial institutions involved, who have to file the necessary paperwork so it is not reported to CRA as a "withdrawal."


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## OhGreatGuru (May 24, 2009)

ButaneProphet said:


> ... I am wondering if it would be wise to put the money into an RRSP then use it to buy the time, if I didn't have to pay tax on it then I would at least have the refund to offset some of the cost of the buyback. *I have no RRSP's at the present time* and lots of unused room.
> 
> ...


I think I misunderstood the question the first time around. I assumed you had existing RRSP money to transfer. If you have the option of buying this service back over time, do they not have an instalment plan for it? If you are doing it either that way, or in periodic lump sums, read the rules on "Prior service contributions" in CRA T4040. For service after 1990, I believe any prior service contributions are tax-deductible, just like your regulation pension contributions, so you should get exactly the same tax deduction as putting it into an RRSP. For service prior to 1990, you can only deduct $3500 per year, up to an aggregate total based on $3500 x the number of calendar years in which the prior service occurred. 

Either way, I don't understand why you feel the need to go through the intermediary of an RRSP.


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## Eclectic12 (Oct 20, 2010)

OhGreatGuru said:


> I think I misunderstood the question the first time around. I assumed you had existing RRSP money to transfer.
> 
> [ ... ]
> 
> Either way, I don't understand why you feel the need to go through the intermediary of an RRSP.


If he has the RRSP contribution room and is allowed to do this, he will get a refund in addition to buying back the service.


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## ButaneProphet (Feb 15, 2011)

You are correct sir. The contribution is tax deductible either way - the benefit to doing it via RRSP would be that I could contribute to an RRSP right now and get the refund this spring as opposed to next year when I file 2011 taxes. And I don't believe they offer any sort of installment plan for the period I am buying back, I have to pay it in a lump sum.



OhGreatGuru said:


> Either way, I don't understand why you feel the need to go through the intermediary of an RRSP.


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## OhGreatGuru (May 24, 2009)

Eclectic12 said:


> If he has the RRSP contribution room and is allowed to do this, he will get a refund in addition to buying back the service.


But he will get exactly the same refund for buying back the service!


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## Eclectic12 (Oct 20, 2010)

OhGreatGuru said:


> But he will get exactly the same refund for buying back the service!


Hmmm ... by george, I missed that - good catch!

However, I think ButaneProphet is clearly well versed as he is pointing out that while the deduction is the same, the RRSP route speeds up when the refund is paid.


Now that I think more about it, going the non-RRSP route has to have some sort of limit to it. He's in a DB plan so the usual employee $3K contribution is a PA of $15K off of RRSP contribution room earned, which doesn't leave much room to equal or exceed the 2010 $22K limit.

Or maybe there is some other mechanism.


Anyway, idle curiosity on my part. Thanks for the correction of my mistake.


Cheers


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