# cashing out defined pension contributions



## moneywise_2017 (Jan 1, 2017)

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or to transfer a tax-exempt portion of the pension of approximately $15,500 to an RRSP while the remainder should be withdrawn in cash and subject to tax deduction.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My question is if I fill in schedule 7 within the first two months of 2017, can I put back the withdrawn amount of $16,680 on a tax-free basis to my RRSP and get a full refund for the difference (at time of filing my taxes), that were the taxes withheld?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


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## lonewolf :) (Sep 13, 2016)

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


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## stardancer (Apr 26, 2009)

moneywise_2017 said:


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


See bold


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## OptsyEagle (Nov 29, 2009)

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.


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## Eclectic12 (Oct 20, 2010)

^^^^

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/papspapar-fefespfer/par-fer/menu-eng.html
http://www.advisor.ca/retirement/retirement-news/area-52-know-your-pension-adjustments-45085/2


Cheers


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## OhGreatGuru (May 24, 2009)

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.


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## OhGreatGuru (May 24, 2009)

moneywise_2017 said:


> ... 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.


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## Eclectic12 (Oct 20, 2010)

OhGreatGuru said:


> 30% is the correct withholding rate for RRSP withdrawals over $15,000.


Agreed ... http://www.taxtips.ca/rrsp/withholdingtax.htm




OhGreatGuru said:


> 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


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## OhGreatGuru (May 24, 2009)

Eclectic12 said:


> 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.


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## moneywise_2017 (Jan 1, 2017)

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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## Eclectic12 (Oct 20, 2010)

OhGreatGuru said:


> 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


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## Beaver101 (Nov 14, 2011)

moneywise_2017 said:


> ... 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).


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## Eclectic12 (Oct 20, 2010)

moneywise_2017 said:


> ... 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/




moneywise_2017 said:


> ... 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.




moneywise_2017 said:


> ... 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.




moneywise_2017 said:


> ... 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.




moneywise_2017 said:


> ... 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.




moneywise_2017 said:


> ... 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.




moneywise_2017 said:


> ... 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


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## moneywise_2017 (Jan 1, 2017)

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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