Pension Payout - Tax Question

[Engine09]

Left my previous employer after 5+ years, have $14K in my pension plan that I've decided to get paid out for. Have already accepted that I'll be taxed and lose 20% off the bat when I choose that option.

My question is, will I pay more at tax time next year with this extra "income" to report? Or is it exempt since the 20% was already taken?


Thank you

[Sliver]

Party at Kryzsky's!

[albertGQ]

Your marginal tax rate is probably higher than 20%, so you'll owe more taxes

[Engine09]

The party is over, I was a musician through pretty much all of my 20s with pretty much no income to speak of, just trying to catch up!

[WilsonFourTwo]

Unless you have a ton of tax credits, you WILL owe more. If you're earning under $41,544, your marginal tax rate is likely around 22-24% (Fed & Prov). If you're earning above that, it is likely pushing 30%. Compare it to the 20% that your company will auto-report.

Next year when you will declare $14,000 in additional income, you will also show that you've paid some tax, and then calculate the difference between owing an prepaid. I will bet you the $14,000 that you will owe more tax than is withheld. It's only a matter of which bracket that $14,000 gets taxed in.

My suggested recommendations (pick any):

1. Take the money and place it directly into an RRSP.
2. Use the money for something that will generate an equivalent (or close) tax credit. (First time homebuyer, perhaps?)
3. Prepay (or better yet) set aside the extra that you figure you'll owe. (Generally, not hard to figure out).

[Shazam]

It's not in a locked-in account? The only thing I could do with mine was transfer it to a LIRA.

[Locke]

With 5+ years of service you should have the option to take at least $10,000 of that as an eligible retiring allowance.

That way the whole $14,000 will be taxed at your marginal rate, but only 10-20% will be withheld on the $4,000 that isnt eligible and the other $10K should go straight into your RRSP.

While the $10K will be taxable income at your marginal rate, it will be accompanied by an offsetting $10K RRSP receipt and having the required room isnt necessary as it will be deemed as an eligible retiring allowance.

[WilsonFourTwo]

Originally Posted by fotze

Same with me, taking out was not an option (I think).

When I left a previous employer (about 5 years ago) I took the entire amount with me. I suppose it depends on the employer and/or plan rules?

I put the money into my self-directed RSP (tax dodge) and whored it out during the last bull market.

[Shazam]

Originally Posted by Locke

With 5+ years of service you should have the option to take at least $10,000 of that as an eligible retiring allowance.

That way the whole $14,000 will be taxed at your marginal rate, but only 10-20% will be withheld on the $4,000 that isnt eligible and the other $10K should go straight into your RRSP.

While the $10K will be taxable income at your marginal rate, it will be accompanied by an offsetting $10K RRSP receipt and having the required room isnt necessary as it will be deemed as an eligible retiring allowance.

Really? That's a hell of a tax dodge.

[Locke]

Originally Posted by Shazam

Really? That's a hell of a tax dodge.

Well, yeah, but it goes straight into your RRSPs so you dont get the eligible cash.

If you get and keep the cash, you have to pay the tax. Otherwise you can defer it.

[Shazam]

Originally Posted by Locke

Well, yeah, but it goes straight into your RRSPs so you dont get the eligible cash.

If you get and keep the cash, you have to pay the tax. Otherwise you can defer it.

Is this money that's considered to be from an RPP? I don't understand how it can be withdrawn at all and not be subject to the same rules that withdrawing from an RRSP early would have.

[Engine09]

Non-locked in. And I'm making 60K so yes, I will get hit a bit harder next year when I report the additional income. On top of that, I was planning to do a bit of work on the side this year to help pay off bills to the tune of ~15K, might not be worthwhile.

Believe me, I would love to transfer the money to a RRSP and let it sit for 1-2 years until I'm ready to buy a house. Right now I have a chunk of student loans remaining to pay off and a Line of Credit, dying to eliminate those and that's why I'm looking at withdrawing the cash.

[cSpooge]

Originally Posted by Locke

With 5+ years of service you should have the option to take at least $10,000 of that as an eligible retiring allowance.

That way the whole $14,000 will be taxed at your marginal rate, but only 10-20% will be withheld on the $4,000 that isnt eligible and the other $10K should go straight into your RRSP.

While the $10K will be taxable income at your marginal rate, it will be accompanied by an offsetting $10K RRSP receipt and having the required room isnt necessary as it will be deemed as an eligible retiring allowance.

if it is a payout of his RPP it is not a retiring allowance, so the only way to put it in to an RRSP is to transfer it to a locked-in account most likely.

[Slava]

Clearly I would have to defer to the experts here but doesn't the retiring allowance only apply to amounts earned before a certain year? I want to say 1997...but that is just my guess.

[Locke]

Originally Posted by cSpooge

if it is a payout of his RPP it is not a retiring allowance, so the only way to put it in to an RRSP is to transfer it to a locked-in account most likely.

You're right if its from an RPP, next time I should read where the money is coming from.

Either way, it seems like he wants the cash in which case hes going to be taxed on it as income at his marginal tax rate which will likely be more than the initial witholding tax.

[VladtheImpaler]

I'm by no means an expert, but if your income is going to be lower when you retire, you should move the money straight into an RSP and defer the tax hit. Of course, you may have a compelling reason to cash out now, such as a $15K credit card debt at 21%.

[Slava]

Originally Posted by VladtheImpaler

I'm by no means an expert, but if your income is going to be lower when you retire, you should move the money straight into an RSP and defer the tax hit. Of course, you may have a compelling reason to cash out now, such as a $15K credit card debt at 21%.

You're right. Unfortunately this seems to be a myth for most people. Basically they think that they are going to live on a lot less than what they earn today, and in reality more and more retirees want income that's at least what they earned heading into retirement, if not more.

I find that if people are living on much less it's purely because they have no choice! The baby boomers are going to be in for an enormous shock in another decade, but that is a whole other discussion.

[albertGQ]

Slava, wouldn't retirees need a lot less since their largest expense (mortgage payments) should be gone by the time they retire?

I'm barely making ends meet right now while I work a FT and PT job, but if I didn't have a mortgage, I would be able to live comfortably on just my FT job

[Southside]

Originally Posted by albertGQ

Slava, wouldn't retirees need a lot less since their largest expense (mortgage payments) should be gone by the time they retire?

I'm barely making ends meet right now while I work a FT and PT job, but if I didn't have a mortgage, I would be able to live comfortably on just my FT job

Myth alot of boomers were lead to believe. Fact is they are bankrolling their kids, travelling and in many cases, yes, retiring with a mortgage. Most will require at least 70% of pre-retirment income.

If you worked for that length of time with the same employer and were a contributing member during that time your benefits would have been vested and locked-in. No withdrawal option, only transfer options. Retiring allowances should not be confused with a pension and the 20% is only a withholding, similar to what your employer deducts from your regular paycheque. So, if you take the cash, be prepared to square up with the tax man.

[albertGQ]

^^^
Well, I think 70% of your pre-retirement earnings is a significant decrease
I could live on that if I was mortgage free