# Defined Contribution Plan - tax implications at retirement age



## mind_business (Sep 24, 2011)

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


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## MoneyGal (Apr 24, 2009)

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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## mind_business (Sep 24, 2011)

MoneyGal said:


> 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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## Daniel A. (Mar 20, 2011)

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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## mind_business (Sep 24, 2011)

Daniel A. said:


> 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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## OptsyEagle (Nov 29, 2009)

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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## mind_business (Sep 24, 2011)

OptsyEagle said:


> 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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## Daniel A. (Mar 20, 2011)

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.


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## MoneyGal (Apr 24, 2009)

mind_business said:


> 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?


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## Daniel A. (Mar 20, 2011)

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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## OhGreatGuru (May 24, 2009)

Daniel A. said:


> 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.
> 
> .....


Only if the employer remains solvent. If it goes bankrupt the pensioners are held out to dry. Just ask Nortel pensioners.


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## Daniel A. (Mar 20, 2011)

Nortel is one of only a handful out of hundreds of plans even in the case of Nortel pensioners they still come out with 60-70 % at the end.
The funding status is far more important a factor than if the company goes bankrupt.

Whatever money is in the plan is protected.


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## Eclectic12 (Oct 20, 2010)

Daniel A. said:


> ...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.


YMMV dramatically so without the details of the DC, I'd stick to "may enjoy lower management fees".


For example, the DC plan I had the option to transfer to had a whopping four choices for MFs, all limited to Canada/US (i.e. equity, bonds, money market and balanced). The MERs charged by the funds ranged from 2.8% to 4.0%, which at the time was the upper range of the local bank's MFs.


At the same time, the company funds contributed were dropping by 1.5% compared to the DB plan.


What the company contracts for and what the DC administrator provides can have a major impact.

Cheers


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## Saniokca (Sep 5, 2009)

Is the pension formula that you get in the DBPP tied to your salary? If so, you should ask HR if the salary that is used in the formula will be frozen at the level that it will be in 3 years (when the freeze happens). If it isn't, your benefit will grow (assuming your salary does) even you don't earn future service in the plan). Also, does your plan provide generous early retirement subsidies? This could mean that the reduction for taking early retirement is small (compared to actuarial reductions), does the pension plan provide a bridge benefit (temporary pension from early retirement to age 65) - as you aren't retirement eligible these might not be reflected in your lump sum value today. 
I would just email/call HR and ask them all these questions before making the selection. Email might be better since they can just forward it to the actuary.

Also, if you convert now you will take the tax hit today. If you don't, you will be taxed when you take the pension on your income at that time (which will probably be at a lower rate - depending how rich you are)...


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