Tax Tip Thursday

A lot of people have recently been or may soon be offered some kind of retirement/severance package or even a pension payout from their employer as a result of their age, the economy, or the financial wellbeing of the company. There are some options available to you that you should know about! Professional advice is always a good idea, but here’s the rundown.

This can be life changing!

Sadly not always in a good way, but it’s always better to know than to be surprised no matter how it’s going to turn out. For example, did you know that if you get a severance package/retirement allowance (lump sum amount), you could potentially roll some or all of it directly into your RRSP? There are, as usual, some rules:

• It cannot come into your hands. It must go directly from your employer to your RRSP.
• If it comes into your hands, you will be taxed on it!
• You have to have enough room in your RRSP (unless a portion of the severance relates to years before 1996). This will save you tax until you take the money out of the RRSP.
• If is really about timing and cashflow
• If you were to receive the severance and then put it in an RRSP, you will pay 30% taxes on it upfront and will have less for your RRSP
• You will get the benefit of the RRSP contribution on your tax return.

Some options to consider…

Severance Pay vs. Lump Sum: This is something that should be considered carefully because both have their pros and their cons. Think about how you manage your money and which would be best for you.

Pension Commutation: Your employer may offer to pay out your pension to you early as one big lump sum. This is called a Commutation of your Pension, but this scenario is quite a bit more complicated than the severance pay one so make sure you get professional advice!

In short, you could choose to just take the monthly pension payment. When you retire, whoever is administering the pension for your company will start paying you out (a bridge amount may be available if you retire at 60). If you choose the commutated value, you will receive a lump sum that is meant to represent the amount you would have to invest today to provide yourself with the same pension starting when you are 65. These numbers can be very large and should definitely be discussed with an accountant or investment advisor. It could literally be millions of dollars!!

A short story to make an example

If you choose to take the commutated value of your pension, you have the option of putting some of it in a Locked-In Registered Account (LIRA). These are completely locked! The problem is that you often can’t put your whole payout into one of these since they have a limit. As a result, you will be taxed on the remaining balance at a very high rate (potentially up to 50%!), and just like that half of your retirement could disappear!

Retiring? Get some advice.

Especially if you’re considering taking the commutated value of your pension. That is a huge amount of money and it is very important to manage it properly so it doesn’t all disappear!

Give us a call and make an appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.