When is the best time to settle your pension? Why waiting until next year can save you money

If you are approaching retirement and considering your retirement options, one of the biggest questions you will face is: When accept pension settlement. Timing is of the essence, and choosing the right time to withdraw can save you a significant amount on taxes.

Many people do not realize how much the timing of pension payments affects their overall tax bill. In this article, we’ll explain why this often makes sense wait until the beginning of the next calendar year before accepting your pension settlement, especially if you receive payment in addition to work.

Problem with collecting your pension this year

If you accept the converted value of your pension, part of the payment will be transferred to you in cash. This money is taxable, which means it will be added to your income for the year. The more income you earn in one year, the higher your tax bracket will be and the more you will owe to the Canada Revenue Agency (CRA).

Let’s assume you work all year round and earn money. If you receive your pension settlement in the same year, taxable part your pension will be stacked in addition to your salary, which will increase your income and possibly move it into a higher tax bracket. This may mean paying thousands more taxes than if you spread your earnings over two years.

How waiting until next year lowers your tax bill

Instead of taking your pension payment in the same year as your salary, you can follow a simple tax-saving strategy: wait until January. Here’s how it works:

• This year: You only pay income tax on your salary. Since you’ve already earned most of your annual salary, it’s a good idea to end the year without adding a large taxable lump sum to your income.
• Next year: When you no longer earn a salary, your your taxable income will be much lower. This is the perfect time to take the taxable portion of your commute’s cash value because you’ll be taxed at a lower rate. The same logic can be applied to follower surplus.

By splitting your salary and retirement settlement between two tax years, you spread your taxable income, keeping your tax bill lower overall.

Why now is the perfect time to plan

If you’re heading into the fall and thinking about your retirement, now is the time to start planning. Most retirement plans provide time window— usually 30 to 90 days, and sometimes up to six months — to make a decision after receiving the documents. If you’re expecting retirement paperwork soon, you have a great opportunity to plan a tax-efficient strategy.

Here’s an example of how you can use this window to your advantage:

• November or December: Suppose you receive your pension papers in November. Instead of settling your taxes right away, you can fill out the forms but delay sending them. This delays the payment of your pension until January 1 of the following year.
• January 1st: On the first day of the new year, submit your paperwork to your pension administrator. This way, your taxable pension payment will count as income in the new tax year, when you will be in a lower tax bracket because you are no longer in receipt of a salary.

This simple change can save you a significant amount on taxes.

How much can you save by waiting?

The exact amount you can save depends on your pension taxable amount and your salary. For most retirees, the taxable portion of their commuter value may range from $100,000 to $200,000 or more.

Here’s why waiting matters:

• If you take that $100,000 taxable while you’re still earning, it will be added to your income, potentially pushing you into a higher tax bracket.
• If you wait until next year when you don’t have a salary, the $100,000 will be taxed at a much lower rate and you’ll end up paying overall less in income tax.

Pension settlement schedule: what you need to do

If you want to maximize your tax savings by planning your retirement for next year, here’s what you should do:

• Get your retirement statement: If you expect to receive your pension settlement documents in the fall, make sure you have all the details. You need to know what part of the travel value will be taxable.
• Hold off on submitting your documents: Once you receive your documents, do not rush to submit them. Gather everything you need, but wait until January 1 to apply.
• Submit on January 1: As the new year begins, submit your pension settlement documents. This will ensure that the taxable cash portion of your pension is included in your income next year rather than this year.
• Talk to a financial advisor: If you’re unsure about the timing or need help calculating how much you’ll save, talk to a financial advisor. They can help you iron out the details and make sure everything is in order for the next tax year.

Retirement and Tax Schedule FAQs

How does the converted value affect my taxes?
The conversion value includes the taxable cash portion that is added to your income for the year. The higher your income, the higher your tax bracket, which means you could pay significantly more in taxes if you take it in the same year as your salary.

What happens if I withdraw my pension this year?
If you withdraw your pension this year, the taxable cash portion will be added to your salary, which could move you into a higher tax bracket. This means you will owe more in taxes than if you waited.

Can I postpone my retirement until next year?
Yes, you can postpone your pension payment until next year. Most retirement plans allow a certain filing period, so you can complete them but wait until January to submit them.

How much can I save by waiting?
The amount you save depends on how much of your earned income is taxable and your salary. By waiting until next year, when you’re no longer earning, you’ll likely find yourself in a lower tax bracket, saving thousands in taxes.

Is there a deadline for pension payments?
Most retirement plans give you 30 to 90 days, and sometimes up to six months, to make a decision after receiving your retirement documents. This gives you time to plan and file for the next tax year.