Commuted pension value and LIRA

[rx7boi]

Hey guys, was wanting to get some suggestions on the most tax efficient way to deal with a LIRA transfer.

I have 79k in pension funds and another 8k in excess contributions. The maximum amount I can transfer into a LIRA is 59k, and the remaining 28k gets paid out in cash at 30% tax rate.

The TFSA is maxed out and I have my 2020 allocation amount all ready to contribute when it resets in a couple months. Should I just take the 28k (20k after taxes) and max out my RRSP's for the year?

I think this merits an appointment with an adviser but wanted to throw it out here for ideas.

[ExtraSlow]

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Hey guys, was wanting to get some suggestions on the most tax efficient way to deal with a LIRA transfer.

I have 79k in pension funds and another 8k in excess contributions. The maximum amount I can transfer into a LIRA is 59k, and the remaining 28k gets paid out in cash at 30% tax rate.

The TFSA is maxed out and I have my 2020 allocation amount all ready to contribute when it resets in a couple months. Should I just take the 28k (20k after taxes) and max out my RRSP's for the year?

I think this merits an appointment with an adviser but wanted to throw it out here for ideas.

Are you at retirement age? I thought you could transfer Locked-in Pensions into a Locked-In RRSP without the tax consequences? I had to do something like that after one of my many carer changes, and now I have a separate Locked-In RRSP account alongside my normal RRSP account.

[eblend]

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The TFSA is maxed out and I have my 2020 allocation amount all ready to contribute when it resets in a couple months.

What do you mean by this? What's resetting in a few months?

When I was in the same situation a few years ago, I just took it all out as cash and put it into RRSP. If you have the room that's what I would do, but I am not finance expert. You can also contribute to RRSP but not claim the full amount this year and carry it forward. Claim enough this year to get into the lower bracket (if possible), then carry forward the rest for the following year (if any left).

- - - Updated - - -

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Are you at retirement age? I thought you could transfer Locked-in Pensions into a Locked-In RRSP without the tax consequences? I had to do something like that after one of my many carer changes, and now I have a separate Locked-In RRSP account alongside my normal RRSP account.

Curious what is the benefit of a Locked-In RRSP vs a LIRA? Isn't Locked-In RRSP something your company would setup for you, where their contribution is locked-in while you are employed with them and you can't touch it until you leave.

[ExtraSlow]

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Curious what is the benefit of a Locked-In RRSP vs a LIRA? Isn't Locked-In RRSP something your company would setup for you, where their contribution is locked-in while you are employed with them and you can't touch it until you leave.

Not really sure. I had what I referred to as a pension, then I left the company, and I don't remember having any option BUT a locked-in RRSP for that money.

[rx7boi]

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Are you at retirement age? I thought you could transfer Locked-in Pensions into a Locked-In RRSP without the tax consequences? I had to do something like that after one of my many carer changes, and now I have a separate Locked-In RRSP account alongside my normal RRSP account.

You can only transfer a certain amount into a LIRA without tax as per Income Tax Regulation, which is 59k. The rest has to be paid out in a lump sum and subject to Federal income tax.

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What do you mean by this? What's resetting in a few months?

When I was in the same situation a few years ago, I just took it all out as cash and put it into RRSP. If you have the room that's what I would do, but I am not finance expert. You can also contribute to RRSP but not claim the full amount this year and carry it forward. Claim enough this year to get into the lower bracket (if possible), then carry forward the rest for the following year (if any left).

Curious what is the benefit of a Locked-In RRSP vs a LIRA? Isn't Locked-In RRSP something your company would setup for you, where their contribution is locked-in while you are employed with them and you can't touch it until you leave.

Sorry, I should have been more clear. TFSA contribution room resets at the beginning of the year but I align it with RRSP deadlines (March 2) so I was incorrect in saying that it resets in a few months.

The TFSA contribution limit is 6000 for the year 2020.

ExtraSlow's locked in RRSP's are the same as LIRA. It sounds like he's made multiple job changes and did not accrue enough in each pension so he never had to worry about any excess being paid out with tax consequences.

[rx7boi]

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Not really sure. I had what I referred to as a pension, then I left the company, and I don't remember having any option BUT a locked-in RRSP for that money.

From what I hear, they typically give you two options. You can either keep it in the pension fund but you don't get diddly squat until 20-fucking-whatever. Your pension will have a cost-of-living adjustment but it's basically going to sit there until you're retired and ready to access it. Fuck that noise. I'd rather take the payout and put it into an index fund and ride it out.

But anyway, @eblend to answer your question, I've never had a LIRA but asset location can have an impact on your retirement. I think I linked the article when you had asked about where to park your investments. Don't quote me on this but if I understood the article correctly, LIRA accounts can impact OAS clawbacks so a consideration is to think about how much money you have in a LIRA as well as what sort of investments you're holding in that vehicle.

Anyway, I'm just an average dude with a mediocre understanding of finances haha. Just trying to figure this out along the way same as everyone else!

[ExtraSlow]

I don't recall having the option to keep it in the pension under any circumstances.

[rx7boi]

I'll take a read through the 2015 that @eblend created:

https://forums.beyond.ca/threads/392...sfer-to-a-LIRA

Edit: Nvm, thread was only like 5 replies haha.

[skandalouz_08]

If you need some help shoot me a PM. I work with this kind of stuff all the time and can give you some guidance.


LIRA and Locked in RSP are basically the same thing but have a different name depending on the province that you're in or if it's federally regulated versus provincial. The basic rules around them are the same. Restrictions around withdrawal until you are 50 or 55, taxable upon withdrawal and certain restrictions that only allow you to take out a certain % each year.

Pension plans differ by company where some companies are able to contribute more into the plan than others. This affects the pension adjustment amount and in come cases companies can end up going over this amount. Based on available contribution room of the OP, the government has calculated that there was that much over contributed based on years of service/working and the $28K has to be taken out and taxed. It doesn't happen in ever circumstance but happens from time to time depending on the company.

[FishPoo]

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I don't recall having the option to keep it in the pension under any circumstances.

Ya Im pretty sure there usually isn't this option, they give you the option to keep it in the same company but a separate pension plan from your work plan (essentially convert your pension plan into a LIRA with your current provider)

[dezmarez]

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Hey guys, was wanting to get some suggestions on the most tax efficient way to deal with a LIRA transfer.

I have 79k in pension funds and another 8k in excess contributions. The maximum amount I can transfer into a LIRA is 59k, and the remaining 28k gets paid out in cash at 30% tax rate.

The TFSA is maxed out and I have my 2020 allocation amount all ready to contribute when it resets in a couple months. Should I just take the 28k (20k after taxes) and max out my RRSP's for the year?

I think this merits an appointment with an adviser but wanted to throw it out here for ideas.

Quick note, the 30% is not your tax rate. That is just what your employer is required to withhold due to the amount.
If you only earn $28,000 of income for 2020, you will be in a much lower tax rate, and get the majority of the 30% withheld after you file your tax return.

Do you have the RRSP contribution room to tax shelter the $28,000?

I'm assuming this payment is being made in 2020. What additional income do you anticipate earning in 2020 if that is the case?
It can be a personal question but, were you laid off and are currently unemployed, or did you leave your current employer and move to another employer?

Those are a couple of the items that should impact your decision from an RRSP perspective.

If you don't anticipate any additional income in 2020, and the $28,000 paid to cash is probably the best solution, given your overall tax rate would be low.
If you are moving employers and continuing to earn your full income for 2020, the $28,000 would likely better off being deferred into your RRSP.

That being said every ones situation is different.

[rx7boi]

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Quick note, the 30% is not your tax rate. That is just what your employer is required to withhold due to the amount.
If you only earn $28,000 of income for 2020, you will be in a much lower tax rate, and get the majority of the 30% withheld after you file your tax return.

Do you have the RRSP contribution room to tax shelter the $28,000?

I'm assuming this payment is being made in 2020. What additional income do you anticipate earning in 2020 if that is the case?
It can be a personal question but, were you laid off and are currently unemployed, or did you leave your current employer and move to another employer?

Those are a couple of the items that should impact your decision from an RRSP perspective.

If you don't anticipate any additional income in 2020, and the $28,000 paid to cash is probably the best solution, given your overall tax rate would be low.
If you are moving employers and continuing to earn your full income for 2020, the $28,000 would likely better off being deferred into your RRSP.

That being said every ones situation is different.

Hey, thanks for the reply. I definitely have the contribution room for 2020 to tax shelter the additional $28,000. The strange thing is that the letter did not highlight being able to transfer non-locked in funds to an RRSP, only as a lump sum cash payout. Yet the LAPP member handbook indicates:

Transfer your pension as a lump sum to a Locked-In Retirement
Account (LIRA), and have any non-locked funds:
• transferred to your RRSP; or
• paid as a taxable cash lump sum payment.

My income will be the same for 2020; just moved on to another job is all. My current employer does not have a pension plan and I'm okay with building a pension from scratch again at my next job, if applicable.

Being able to transfer the remainder of non-locked in funds to an RRSP really simplifies my decision for me and should bring me into a lower tax bracket for 2020.

[dezmarez]

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Hey, thanks for the reply. I definitely have the contribution room for 2020 to tax shelter the additional $28,000. The strange thing is that the letter did not highlight being able to transfer non-locked in funds to an RRSP, only as a lump sum cash payout. Yet the LAPP member handbook indicates:

Transfer your pension as a lump sum to a Locked-In Retirement
Account (LIRA), and have any non-locked funds:
• transferred to your RRSP; or
• paid as a taxable cash lump sum payment.

My income will be the same for 2020; just moved on to another job is all. My current employer does not have a pension plan and I'm okay with building a pension from scratch again at my next job, if applicable.

Being able to transfer the remainder of non-locked in funds to an RRSP really simplifies my decision for me and should bring me into a lower tax bracket for 2020.

No problem at all. That is interesting that they won't allow you on the form... maybe reach out to LAPP directly and see what they have to say. That doesn't make any sense why they wouldn't give you that option.

[rx7boi]

Gave LAPP a call and they said that I have to take the 28k as a cash payout. I mentioned that the LAPP handbook said transferring to an RRSP was listed as an option and asked for more information. The answer was essentially "that's the way your plan is structured."

After reading the handbook in a bit more detail, the next section indicates a stipulation for transfers into an RRSP:

If the pension earned on your LAPP service is lower than a minimum amount
established under LAPP rules, you will be offered an opportunity to have
the value of the pension paid as a single payment. This amount can be paid
directly to you as a taxable cash payment, or it can be tax sheltered and
transferred to an RRSP.

TL;DR I am getting too big of a payout to tax shelter all of my pension fund.

#FirstWorldProblems

[dezmarez]

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Gave LAPP a call and they said that I have to take the 28k as a cash payout. I mentioned that the LAPP handbook said transferring to an RRSP was listed as an option and asked for more information. The answer was essentially "that's the way your plan is structured."

After reading the handbook in a bit more detail, the next section indicates a stipulation for transfers into an RRSP:

If the pension earned on your LAPP service is lower than a minimum amount
established under LAPP rules, you will be offered an opportunity to have
the value of the pension paid as a single payment. This amount can be paid
directly to you as a taxable cash payment, or it can be tax sheltered and
transferred to an RRSP.

TL;DR I am getting too big of a payout to tax shelter all of my pension fund.

#FirstWorldProblems

In this case, when you receive the net proceeds ($19,600) transfer those to your RRSP.
If you have an additional $8,400 lying around, roll that into your RRSP as well. When it comes to tax time next year, you should receive the 30% withheld back in the form of a tax refund.
(That being said, other income received throughout the year will impact this)

Keep in mind the benefit of being able to defer that payment directly into your RRSP is it saves you the steps of having to come up with extra funds to deposit into your RRSP account, and wait for a refund. Either way, you will have to claim the $28,000 of income.

Worst case scenario, if you don't have $8,400 lying around, get an RRSP Loan in February 2021, make the top up to your RRSP, file your taxes, receive your refund, and pay the RRSP loan off. That way you only end up paying interest for a couple months on the RRSP loan.

Hope that makes sense haha

[rx7boi]

Yeah, I was really hoping to just have it transferred and save the hassle of having to come up with the remainder to offset the tax implications.

I'd have to review my RRSP contributions for this tax season but whatever I get back for a return will go directly into the RRSP or TFSA.

[ExtraSlow]

Take the cash payout and walk straight to your nearest Ford dealer to put it down on a Raptor. YOLO BABYYYYYY!

[tonytiger55]

Are the funds locked in on the company side? I'm betting it is.

That would explain why it has to be paid out to a LIRA. The transfer has to be instrument to instrument. So in this case its LIRA to LIRA.

You can't transfer to a RRSP as it would break the above rule.

In regards to the tax efficient way. That depends on your financial planning and if you need access to those funds. Because the funds will be locked (LIRA).
A Financial Planner (not advisor or investor) can do the projected calculations.
Then the accountant can see the taxation based on those projections and how it That's one way of doing it but it may be a bit over kill. Better to have a friend who is accountant in that scenario and pay them in beer.

Another variable to consider is opportunity costs. The LIRA may not be the best option. Depending on where you are in your personal financial cycle. Having access to those funds may help when going into the next chapter in your life.

[dezmarez]

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If you need some help shoot me a PM. I work with this kind of stuff all the time and can give you some guidance.


LIRA and Locked in RSP are basically the same thing but have a different name depending on the province that you're in or if it's federally regulated versus provincial. The basic rules around them are the same. Restrictions around withdrawal until you are 50 or 55, taxable upon withdrawal and certain restrictions that only allow you to take out a certain % each year.

Pension plans differ by company where some companies are able to contribute more into the plan than others. This affects the pension adjustment amount and in come cases companies can end up going over this amount. Based on available contribution room of the OP, the government has calculated that there was that much over contributed based on years of service/working and the $28K has to be taken out and taxed. It doesn't happen in ever circumstance but happens from time to time depending on the company.

Exactly. The commuted value is based on a number of factors. OP's age, interest rates etc.
Once that is determined, they come up with the "Allowable Amount transfer to a LIRA" which is a standard formula.

LAPP is a Defined Benefit Plan, so, the way they would calculate it is as follows:

(I'm assuming OP is under 50)

Annual Retirement Benefit x Present Value Factor (This is set by the government, if you are under 50 this is "9").

So, based on the information above, I'm assuming OP had accumulated an annual retirement benefit based on years of service x salary etc of $6,550.

Using the formula:

$6,550 (Annual Retirement Benefit) x 9 (Present Value Factor) = $59,000

If your commuted value is above the $59,000, any excess amount is taxable as income, unless you defer it to an RRSP.

Furthermore, I would assume OP was working with their employer for about 5 years (give or take a year haha)

[rx7boi]

In my case, any amount above $59,000 cannot be deferred to an RRSP and has to be taken out as cash as confirmed with my phone call with LAPP.

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Are the funds locked in on the company side? I'm betting it is.

That would explain why it has to be paid out to a LIRA. The transfer has to be instrument to instrument. So in this case its LIRA to LIRA.

You can't transfer to a RRSP as it would break the above rule.

In regards to the tax efficient way. That depends on your financial planning and if you need access to those funds. Because the funds will be locked (LIRA).
A Financial Planner (not advisor or investor) can do the projected calculations.
Then the accountant can see the taxation based on those projections and how it That's one way of doing it but it may be a bit over kill. Better to have a friend who is accountant in that scenario and pay them in beer.

Another variable to consider is opportunity costs. The LIRA may not be the best option. Depending on where you are in your personal financial cycle. Having access to those funds may help when going into the next chapter in your life.

I'm not sure where I was going with it in terms of tax efficiency but dezmarez's advice is sound. Basically I just wanted to pay as little tax as possible so it would have been nice to transfer the entire amount into an RRSP, but they won't let me so the next best thing is to take the payout after tax and apply it back into my RRSP, and then some.

The pension money was always meant to be for retirement so I'm happy to just let it ride in a LIRA.

That, or I can go truck shopping with @ExtraSlow cause Raptors are the bee's knees.