Need advice financial advice for DD

iVillage Member
Registered: 08-24-2007
Need advice financial advice for DD
2
Sun, 06-10-2012 - 8:03pm

DD is trying to make a financial decision and we're wondering what everyone on the board thinks.

DD is currently working for the government as a term worker, which means she currently has benefits.  Her term runs out in December and she'll have 20 months of service at that time.  With the massive budget cuts that are going on, it's likely she will not be renewed at the end of the year.

If an employee leaves the public service with less than 2 years of service, they are refunded the money they contributed to the pension plan dollar for dollar as taxable income.  If they have over 2 years of service, the rules change : they can either leave their years of service with the government employee pension plan (to be paid at 60 years of age) or they can cash out the value, which would include not only their contribution but the employer contributions.  This would almost double her money. 

DD has been cashed out in the past, during her student positions with the government.  These months can be counted as years of service if she reimburses the money that was cashed-out of the pension plan.  This means she has the option of buying-back the time.  She thinks it's about 1 year of service at $3,000.  If she buys back the year, that would put her over the 2 year mark should her employment cease at the end of the year.

Here's the problem: DD is broke because she's been making double payments to her massive student loans.  She has about $2,500 in savings right now, but she was actually saving money so that she could continue to pay rent and her student loan if she loses her job.  She went through almost 2 years of unemployment before landing this position, so she's leary to let go of the cash she currently has. 

If she were to buy back the service, she could either leave it with the government (in hopes of landing another government job) or transfer it to an RRSP so that it wouldn't be taxed.  She does not view it as cash that would be available to her if she lost her job.

She's very concerned about blowing all of her savings to buy back this time.  I can understand her trepidation but at the same time I would have to see her lose the employer's contribution should she become unemployed in December.  She's not sure she can make much headway with her savings during the next 6 months of the year.

What do you think she should do?

Kate


empty purse

iVillage Member
Registered: 05-08-2006
Sun, 06-10-2012 - 10:42pm
Does she have to buy back the whole year, or just four months? What if she stopped double paying her student loans for the next six months and saved that money? Maybe she should do that anyway. If she keeps this job or finds another one quickly, she could make a big lump sum payment. If not she would have that money to use to buy back time or to pay her loans for six months of layoffs. If she does this n'e, if she gets another government job, she wouldn't ge caught in this rule again, right? What would it cost her in interest to do that? Best wishes. SJ
Avatar for poorboy2011
iVillage Member
Registered: 10-02-2011
Sun, 06-10-2012 - 11:59pm
small_change wrote:

If she were to buy back the service, she could either leave it with the government (in hopes of landing another government job) or transfer it to an RRSP so that it wouldn't be taxed.  She does not view it as cash that would be available to her if she lost her job.

This, to me, is key. If she's willing to cash out in case of financial stress, then there is more flexibility: she could even carry a certain amount of extra debt to "double her money." At the end she just has to make a profit, and the potential to cash out the benefits offers a greater safety margin. But if she's unwilling to cash it out, then it seems like we're really talking about whether or not she will need $2,500. In that case it doesn't seem like a good idea to buy back the benefit.

I don't know her rent and loan repayment amounts, but $2,500 seems kind of low to me if she's expecting to go through a substantial period of unemployment. 

Maybe you can convince her to regard the $3,000 as an investment, with the understanding that she will have to cash out in case of emergency? But then, in the meanwhile, you'll probably feel compelled to provide her with the safety margin. That's more stress to you.

It seems like it would help if your DD gets a more precise idea of the figures involved. The calculation should be as exact as possible. This kind of stuff always makes me worried: what if I got the numbers wrong, what if I misunderstood the rules, what if I miscounted this or that...

Good luck. (I may be faced with a similar situation when I change my job -- will I cash out my benefits, at a pretty steep tax penalty, or will I transfer my benefits? And if the amount is just enough to get me out of debt, will that make a difference?)