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  • Pension Tax Liability

    I have a company pension.
    It is a "defined benefit" plan where I put in a certain amount and the company matches that amount.
    When I retire, the pension pays out a monthly amount based on what has been accumulated.

    On the NFP statement I added the amount that the pension was valued at on our date of Separation.
    At that time I was represented and my lawyer said that I was entiteld to also add an amount under the "liability" heading due to the tax implications of this future income.
    The amount that I put in there was 30% of the value. Basically I was saying that I would "lose" 30% of the value due to income tax payable on the earned income that will be earned.

    Now my EX and I are getting down to the end. Outside mediation and then trial in November if we don't figure this stuff out.

    During our last Conference, the EX wanted to know why the value of the pension today was not put in the document. The value has increased by about 40% due to the bounce back in the market and astute investing on my part. Judge told her no way. Valuation based on separation date. The EX also brought up the fact that I had included this liability on the NFP and why was I allowed to do that if I was not going to be "cashing in" the money to equalize.
    Now I can't "cash in" this money to satisfy equalization, but I can transfer ownership of a portion of it to satisfy any potential equalization.
    The judge, without going into great detail and asking questions about the specifics of the plan, basically agreed with her. If I was not "cashing in the RRSP's within a short period of time" as he put it, then no liability should be recorded. To be clear, I don't have RRSP's. I have mutual funds within the pension plan.

    My lawyer at the time was very clear that this was "common practice" within the NFP calculation. I am no longer represented and I am trying to put my thoughts down for mediation, with the eye on building materials for a potential trial.

    Does anyone out there have any experience with this type of thing?
    How do I determine, as acurately as possible, what my correct tax liability should be? (30%, 25%, 10%)

  • #2
    30% is at the high end of tax brackets to use, 20-25% would be more reasonable unless this is a REALLY valuable plan.

    If you will be transferring the pension to her as part of equalization, then you shouldn't be putting in any tax liability on the portion transferred to her since she will be the one withdrawing it down the road and paying the tax. Indeed SHE would be rightfully able to show a tax liability on the transferred amount.

    Comment


    • #3
      Thanks Dad,
      I guess one of the things that I don't understand is that if I were to use the tax liability, say 25%, it may reduce my equalization payment down to $2,000. If I don't use the tax liability, my equalization payment becomes $10,000 payable to her.
      The calculation needs to be done first in order to determine IF I will be making a payment. Right?

      Assuming I have to pay $2,000 to her......Would I not "gross up" that amount by what her potential tax liability may be so that she "remains whole" through the process?

      Does that make sense?

      Comment


      • #4
        OK, the judge at the Case Conference was wrong as far as anything 2 lawyers and a senior law clerk have told me, as well as logic. You are totalling your assets. The pension/RRSP include a liability, so it is only worth appx 75% of face value.

        I won't dare claim to be either smarter or more knowledgable than a judge, so I suspect there may have been some miscommunication or misunderstanding somewhere in there.

        I'll point out that both my ex and me used the same method of putting in a tax liability and our judge thought it was just fine. AFAIK your original lawyer was correct and this is universal practice.

        When you then transfer some amount of pension/RRSP to your ex, it should be topped up to account for the 25% liability, you should transfer $1.25/dollar.

        If you are making an offer, include the liability in your net worth calculations, and offer 1.25 to her as settlement. State that this is your offer, take it or leave it, you don't want to waste time arguing over standard practice just because a judge had 10 minutes to read your financials and make a quick comment.

        Alternatively, agree to what she asks for the sake of quick settlement and bite your tongue.

        If you go to trial, just make your case and live with result.

        Comment


        • #5
          Assuming this pension is NOT tax-deferred (i.e. when you retire, the amounts paid to you are NOT included in taxable income). IGNORE the following if that is an incorrect assumption!

          Right now, someone is paying taxes each year on the capital gains + interest earned. That doesn't start just when you retire. Are you already paying these taxes? Or is it somehow charged back to the plan?

          I'd think that if these taxes are charged back into the plan somehow, then they should already be accounted for when determining the value in X years.

          During retirement, the taxes (on capgains+interest) each year will gradually decline as your plan depletes. Possibly the first year you withdraw 5% of the plan total, and if the capgains+interest that year are, say 4%+2%, then you would be taxed on that (4%/2 + 2% = 4%) at your rate of 30%. Notice that the withdrawal amount and the tax amount are completely independent. And as time goes on, and the plan is depleted, that tax burden will decrease to 0%. So just saying it's very difficult to come up with a single % value. There are lawyers who specialize in pension valuations for divorce, possibly you can get a consult with one?
          Last edited by dinkyface; 06-25-2010, 01:36 PM.

          Comment


          • #6
            Thanks for the info.
            The money that is paid into the funds is from my "gross" income, so it is untaxed.
            The amount that I will withdraw on a monthly basis will be calculated when I retire.
            So the amount of money in the "account" will determine my "income".
            When the funds are paid on a monthly basis, I will be taxed on my "earnings".
            There are no capital gains taxes being paid. The interest that is growing is growing tax free right now. The tax on that growth will be paid as part of my "income" when I retire.
            I don't believe that the taxes will decrease year over year because the income stream is ment to stay constant until death, or the fund is empty.
            Does that change your opinion on my situation?

            Comment

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