When you retire, will you be able to put all of your pension savings into an RRSP?
No. At retirement, you might be eligible to transfer a portion of your pension to an RRSP. The transfer of your pension’s commuted value to an RRSP is restricted under DB pensions. DB pensions forbid you from doing so, or transfer to a LIRA after you reach a particular age: OMERS age 55; Police age 50. You will need to check with your pension administrator. They make the rules for your plan. We get phone calls like this: “I’m 59 and my pension admin say that I cannot take the commuted value. Can you help me?” No. The pension document states the maximum age for transfer of the commuted value. That’s final. We cannot help. So, if you are thinking commuted value, step 1: check with your pension admin.
The Commuted Value
The commuted value is either transferred to a copycat pension OR the commuted value [CV]. There is a maximum transfer value of the CV based on constraints in the Income Tax Act if you desire to transfer a DB pension to an LIRA or RRSP after quitting the plan. The maximum transfer amount is often between 50 and 75 percent of the value of a pension that has been commuted, but this varies. Look up “Maximum Transfer Value” in Google for details. Every pension plan is unique. The calculations used to determine values depend on dynamic elements like the current interest rate, your age, your sex, etc. Higher commuted values, which are more likely to be partially ineligible for transfer to a LIRA or RRSP, come from lower interest rates.
The usual process is this. Transfer the commuted value to a LIRA up to the maximum transfer limit. Transfer some of the cash surplus to your RRSP [if you have room]. Take the balance in cash and pay the tax.
The after-tax component of the commuted value can be used to fund your spouse’s RRSP, but doing so will result in a tax reduction that for the spouse. This is NOT a spousal RRSP contribution. Your income inclusion from the pension transfer is not immediately affected. Your spouse will save on tax so your spouse will be happy with you. That’s all you get, a pat on the head.
If your plan is a defined contribution [DC] plan, you can tax shelter the entire amount. Normally, the portion contributed by your company goes to a locked in account, a LIRA. The portion that you personally contributed should go to an RRSP. This latter transfer does not depend on available RRSP contribution room. You can then invest both the LIRA & RRSP in investments funds, etc. The locked-in condition normally prohibits withdrawals before the age of 55. The maximum yearly withdrawal amount from a LIRA is determined by your age as a percentage of the account value. Look at RRIF / LIF minimum & maximum withdrawals on Google.
What About The Tax Free Savings Account (TFSA)?
You can transfer surplus cash to a TFSA. However doing so won’t directly result in a tax savings. TFSAs only allow you to avoid paying taxes on future income and growth. The TFSA does not provide tax deductions. Since there is no immediate tax advantage, only the after-tax portion from pension distribution may be utilized to fund a TFSA contribution.