# HELP! Need Pension Buy-Back advice!



## miguel (Dec 7, 2010)

Here is the situation. I have the option to buyback 3 years of service from 1997-2000 with OMERS pension plan.

For the sake of round numbers, the buyback is $20,000.
I have $20,000 in cash I can pay directly OR I have $20,000 in unused RRSP contribution room I can use. Meaning transfer $20K to RRSP and then use RRSP money to do the buyback directly via a T2033 form.

My question is... in which scenerio am I better of? paying cash or RRSP transfer?


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## Guest (Dec 7, 2010)

Hello ... suggest might not be that simple ... suggest first contact Canada Revenue Agency (CRA) ... e.g. http://www.tpsgc-pwgsc.gc.ca/pension/act/rachat-buyback/fiscale-tax-eng.html ... e.g. Under the Income Tax Act rules for Registered Pension Plans (RPP), a plan may not recognize periods of past service that occurred after December 31, 1989 for pension purposes unless officials of the Canada Revenue Agency (CRA) certify the PSPA calculated and reported in respect of that service ... and on and on ...


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## MoneyGal (Apr 24, 2009)

Presuming the T2033 option is valid, there really isn't any difference in which option you choose at least considered from _today's point of view_. 

You could look at it this way: your total assets are $xxxx, some of which is in cash, and some of which is in your RRSP. It doesn't matter whether you use cash or existing RRSP dollars to do the pension buy-back, because it does not change your existing wealth or personal balance sheet.

However, beyond dollars, what are you really exchanging when you transfer money out of your RRSP and into a DB pension plan? You are exchanging dollars (in the RRSP) which have the promise, but no guarantee, of beating the implied rate of return from the future pension income - for a guaranteed, longevity-insured stream of income...which may be less than you could achieve with the same dollars invested through your RRSP. 

In addition to _rate of return_ calculations, you should think about _liquidity_ both now and later. RRSP dollars are (relatively) liquid; pension dollars are completely illiquid and the decision to buy back the past years of service is irreversible. If you change your mind, and decide you want less pension later, you can't get that $20K back. You might want to keep more dollars in your RRSP - and the relative balance between your RRSP and your future pension entitlements - simply to maintain liquidity. 

In your shoes, I would probably use the cash. But I don't know what your other options for that cash are, or anything about your financial situation other than what you've posted in this short question.


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## miguel (Dec 7, 2010)

I think there is a bit of a misunderstanding. There is implications on overall finance if I go with RRSP. If I dump the $20K into RRSP and then transfer out to OMERS, I should receive approx $7500 of that back from the Gov. as an RRSP contribution. If I pay it in cash, I leave my rrsp contribution room there for a later date.

If I pay it cash directly to OMERS, do I get any of it back... is it tax deductable since its post 1989 years of service that Id be buying? Will I get anything back from the government when I do my taxes if I pay cash?


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## miguel (Dec 7, 2010)

Here is what CRA says:

http://www.tpsgc-pwgsc.gc.ca/pension/act/rachat-buyback/fiscale-tax-eng.html
Contributions for service which occurred after December 31, 1989 are fully tax deductible for the tax year in which they were paid. There is no limit to the tax deductibility of post-1989 contributions provided you have equal net taxable income for that year. You may consult Chapter 1 of CRA’s guide entitled RRSPs and Other Registered Plans for Retirement (T4040) for further information on the tax deductibility of Registered Pension Plan contributions.

So am I reading this correctly? If I pay cash, its fully deductible and I DONT have to use up my RRSP deduction limit?


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## Eclectic12 (Oct 20, 2010)

miguel said:


> Here is what CRA says:
> 
> http://www.tpsgc-pwgsc.gc.ca/pension/act/rachat-buyback/fiscale-tax-eng.html
> Contributions for service which occurred after December 31, 1989 are fully tax deductible for the tax year in which they were paid. There is no limit to the tax deductibility of post-1989 contributions provided you have equal net taxable income for that year. You may consult Chapter 1 of CRA’s guide entitled RRSPs and Other Registered Plans for Retirement (T4040) for further information on the tax deductibility of Registered Pension Plan contributions.
> ...


I doubt it the "RRSP deduction limit" part. 

The way I read the part quoted, RRSP contribution room is not discussed.

When I click on the URL provided, RRSP room is mentioned but seems to say it will be an issue:

"If your RRSP deduction limit (RRSP room) does not permit 
the certification of the PSPA, your prior service cannot 
be counted and any payments you may have made will be 
refunded to you."

I also notice that URL goes to Public Works and not the Canada Revenue
Agency (CRA).

I'd either contact them or your Pension specialist to get a better explanation.
Knowing that the government wants money, I'd be surprised if there was a way
to buy past service in a pension *without* impacting RRSP room.


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## Eclectic12 (Oct 20, 2010)

miguel said:


> I think there is a bit of a misunderstanding. There is implications on overall finance if I go with RRSP. If I dump the $20K into RRSP and then transfer out to OMERS, I should receive approx $7500 of that back from the Gov. as an RRSP contribution. If I pay it in cash, I leave my rrsp contribution room there for a later date.
> 
> If I pay it cash directly to OMERS, do I get any of it back... is it tax deductable since its post 1989 years of service that Id be buying? Will I get anything back from the government when I do my taxes if I pay cash?


I'm not a tax expert and in my case, the buy back cost didn't make sense for me to use this option.

That said, I'd expect regardless of which option, there'd be a tax refund as the buy-back is sheltered money that taxes have been paid on.

I'm thinking that since the money is being sheltered using today's dollars, the tax refund will come from this year's tax return.  If so, the cash or RRSP won't matter.

If paying cash results in previous tax returns being adjusted - then there may be an advantage to going the RRSP route. Previous returns may have a lower income and tax rate while the RRSP route uses today's income/tax rates.


Interesting question though ...


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