Personal Finance

Buyback of pension following mat leave - transfer from RRSP or cash buy back?

  • Last Updated:
  • May 18th, 2018 12:19 pm
[OP]
Jr. Member
Jul 19, 2007
191 posts
37 upvotes
Guelph

Buyback of pension following mat leave - transfer from RRSP or cash buy back?

My wife is intending to buy back her pension to OMERS following her mat leave that ended in May 2017. She has until the end of this calendar year to buy it back. The question is: is there any advantage to buying it back with cash (which we have sitting in a TFSA), or transferring the amount from her RRSP account (which we already have enough in)? I am confused as to which is the better strategy after considering tax implications, etc. Any informed advice is appreciated!
4 replies
Deal Addict
Jan 15, 2017
1145 posts
835 upvotes
RRSP. With a defined benefit pension, when is your wife planning to use her RRSP? The primary goal of a RRSP is to defer taxes to retirement. At retirement, your income should be in a lower tax bracket than when you contributed to the RRSP. This may be difficult to achieve with a DB pension. Use the RRSP money now as this is an effective use of the funds.
Deal Addict
Nov 24, 2013
4719 posts
1435 upvotes
Kingston, ON
skeet50 wrote:
May 18th, 2018 8:49 am
RRSP. With a defined benefit pension, when is your wife planning to use her RRSP? The primary goal of a RRSP is to defer taxes to retirement. At retirement, your income should be in a lower tax bracket than when you contributed to the RRSP. This may be difficult to achieve with a DB pension. Use the RRSP money now as this is an effective use of the funds.
I'll add to this. 20 to 30 years from now, it's retirement time. The pension is about to start. Would you rather:
a)Have a higher RRSP balance that you have to plan how to withdraw in a tax-efficient manner on top of your pension
or
b)Have a higher TFSA balance because you left that amount in your TFSA to grow, way back when, and you can withdraw or not withdraw it at your leisure.

If there's already a DB pension coming, TFSA is usually the preferred vehicle for additional retirement savings. Utilize RRSP contributions when you still have room after your Pension Adjustment and your marginal rate is high, sure, but ultimately you'd prefer higher TFSA and lower RRIF in retirement, especially if high RRIF would put you up to the OAS clawback level.
Deal Addict
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Mar 9, 2012
1292 posts
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KITCHENER
I'm going to answer differently: What is her retirement age? Is she looking for 30 years at 55 or 35 years at 55? Or will she not be hitting those at either 55, 60 or 65? How many years did she want in? Here's another thing, if she's going to have 35 at 55 even with the mat leave, there's no point of buying back a year (this suggests she started putting into OMERS before her 20th birthday).

If they above a all 'moot' to you guys, then I'm with the other guy, use your RRSP, as it will be the 'same difference' when it comes to your tax implications. Though you might expect a larger return if she'd use her TFSA (as she'd have the OMERS buy back (employee and employer, as she has to pay for both) + OMERS for 2018), assuming the room is there. For example, if she's making $60,000/year, she'd have an additional $10,800 (roughly) in tax deferred income.

So to summarize: TFSA for 2016/2017 OMERS buy back: You should get a larger return for your 2018 Return when you file in 2019. RRSP for 2016/2017 OMERS buy back: No tax implications. $10,800 going out, $10,800 going back in.

Curious, you have enough RRSP to put any of that money into OMERS AVC's? Unsure if you'll find anyplace that will give you better returns.
[OP]
Jr. Member
Jul 19, 2007
191 posts
37 upvotes
Guelph
Thanks everyone, for your advice. I agree that we would rather have the flexibility to withdraw funds at any time before or during retirement, so keeping the TFSA intact is ideal given we both have DB pensions. Icing on the cake is that she is currently on a second mat leave this year, so her earnings will be lower this year too, reducing the benefit of making a cash payment to OMERS since her marginal rate will be lower than usual since her salary is reduced substantially on mat leave.
jeff1970 wrote:
May 18th, 2018 10:28 am
I'm going to answer differently: What is her retirement age? Is she looking for 30 years at 55 or 35 years at 55? Or will she not be hitting those at either 55, 60 or 65? How many years did she want in? Here's another thing, if she's going to have 35 at 55 even with the mat leave, there's no point of buying back a year (this suggests she started putting into OMERS before her 20th birthday).
She is looking for 30 years at 55.

Never heard of OMERS AVC's until your post. Just looked them up... d'oh! Could have been using them all this time instead of e-series!

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