How will a pension buyback impact your income tax return?
Public sector pensions use formulas based on the length of service made by an employee to determine that employee’s pension when he or she retires. A pension buyback allows an employee to buy an amount of service, or time, that increases the pension’s value. This buyback amount can be tax deductible, but usually, it will need to be planned carefully to maximize the benefits. For example, a large buyback can result in it being greater than your income for that year. Since you can’t deduct more than your income nor can you carry forward non-deducted amounts to a following year, it might be better for it to be structured over several years. Another option is to pay for some or all of it with registered in contrast to non-registered funds.
Key Takeaways:
- In the federal government’s defined-benefit pension plan, a pension buyback is a legally-binding agreement “to purchase a period of prior service to increase your pensionable service under the federal public service pension plan.”
- When using a transfer from your Registered Retirement Savings Plan (RRSP), you won’t get a tax deduction for the past service you purchase.
- The right solution will depend on the availability of funds to use for the buyback, the source of your funds, and the size of the buyback amount relative to your taxable income.
“Even if you can deduct the cost in one year, it’s usually better, from a tax standpoint, to take the deductions over several years, if you have that option.”