Pension Annuity vs Lump Sum Tax

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DBinROC
Posts: 6
Joined: Fri Mar 10, 2023 4:29 pm

Pension Annuity vs Lump Sum Tax

Post by DBinROC »

Hi Nelson
A quick question I hope. I'm a dual citizen CAN/US and US resident for many years. Planning to remain in USA in retirement. About to take a DB pension from previous CDN employer. I have about two weeks to decide.

Looking over the site, I understand the tax treatment of CPP, OAS, SS and RRSP when converted to RRIF. Also aware of WEP impact on SS.

However, the DB options have me now investigating the transfer of a portion (about 85%) of the lump sum to a locked in account, which I don't currently have. TD bank will open one quickly, but it needs to be a Savings account LIRA at a branch and therefore limited to GIC investments only. (Current 1 year GIC rate is 4.6%.) I did emphasize that speed to open a LIRA was of the essence. Assuming I do this, and unlock the LIRA account later as a non-resident, then that full lump sum becomes taxed at 25% by CRA? I'd then use this tax as a credit on my US return for that year. Once unlocked, its treated by IRS as an RRSP/RRIF. So unlocking costs one time 25% tax, and account is subsequently taxed at 15% CRA witholding. Correct?

Or I could just take the periodic payments from the locked LIRA with at 15% CRA withholding each year.

The other DB option is to take the DB pension as an annuity stream. It would be taxed by IRA as pension income, but can I petition this to not have a CRA witholding like CPP payments? If not, are annuity pension payments withheld at 15% by CRA and claimed as then allowed as foreign tax credits on US return each year?

Beyond the basic annuity vs lump sum payout comparisons, is there a US tax advantaged reason to take the lump sum, transfer to LIRA, then unlock the LIRA route? Is it sort of like doing a Roth conversion strategy? Pay lower tax now vs higher later? Or simply avoid all these hoops and just file each year with a pension annuity income from Canada? I'll be doing this anyway with both my spouses and my CPP and OAS.

Id appreciate your insight on strategy. Thanks
nelsona
Posts: 18347
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Pension Annuity vs Lump Sum Tax

Post by nelsona »

some points to consider:

Transferring a pension to a LIRA is NOT a taxable event, in either US or Canada. Only withdrawals are taxable in both countries, wether lum-sum or periodic. Lump sums would be withheld at 25%, periodic would be 15%. 100% of the withdrawal from funds arising from a CDn pension would be taxable in US (credit would be given for the Cdn tax paid).

An annuity would be treated like a periodic withdrawal. One cannot be exempted from Cdn withholding on these funds. A US resident does not "petition this to not have a CRA witholding like CPP payments"> CPP and OAS payments are automatically by treaty exempt from Cdn taxation, not any other pensions.

As to where to put the LIRA. "Banks" are not allowed to offer you anything other than cash investing for a LIRA, RRSP, etc. However brokers, including the brokerage arms of most banks ARE allowed to have you set up brokerage accounts, in which you can invest the funds in a wide variety of investment vehicles.

As to your strategies, remember that MOVING funds from the pension to a LIRA is not a taxable event, so there is no tax strategy here.

It is when you decide to "unlock" the newly formed LRIA that you have choices
1. Leave it in a LIRA, eventually changing it into a LIF, and withdrawing periodically
2. Collapsing some or all of the LIRA (with govt permission) and either (a) taking those funds OUT of the LIRA, (b) putting them in an RRSP or RRIF (depending on the govt rules of the LIRA transfers.

Just to clarify one statement you made: Any of the strategies in which you withdraw funds lump sum, is really a pat HIGHER taxes now so as to pay lower taxes later, not the other way, as you describe.

MY opinion: Unless you are MANY years from retirement, withdrawing any funds at the 25% tax level is not worth it. Better to withdraw periodically, at the 15% Cdn tax level. This will reduce the large tax hit to your funds, and will allow yo uto better mesh the Cdn tax and the credit you will get for those taxes on your US return.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
DBinROC
Posts: 6
Joined: Fri Mar 10, 2023 4:29 pm

Re: Pension Annuity vs Lump Sum Tax

Post by DBinROC »

Thanks so much.

Yes, I meant the LIRA unlocking would incur a 25% tax withholding. Not the transfer from pension funds into the LIRA. Since I’m now retired, it’s a good point about the runway required to earn back that hit.

Initially I was indifferent to the lump sum vs annuity decision. But I think it’s now an easy choice to take the company annuity payments and their 15% withholding. I’m frequently visiting Canada and having a bit of local cash there avoids FX variances and timing.

For the record, I have paid the initial Serbinski consulting fee and spoke with Doug on a couple of other topics. It’s well worth it and reading the forum only reinforces how many people are looking for something for nothing.

I appreciate your time, intellect and patience.

Best regards.
nelsona
Posts: 18347
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Pension Annuity vs Lump Sum Tax

Post by nelsona »

It isn't really a lump-sum vs. annuity decision, it is a lump sum, annuity, or rollover to a self-directed LIF, and withdraw the periodic annual ammount.
Your annuity might not be at a very good rate, as most annuities are not.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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