Evelyn Jacks: Planning to leave work means planned savings

If early retirement — enforced or chosen — is in the cards, take advantage of employer-provided pre-retirement counseling. This tax-free benefit can save you money.

All too often since the Great Recession of 2008, early retirement begins with termination from employment and a severance package. Or, you may retire voluntarily after long service, in which case you may receive a retiring allowance. Either way, this payment could be the largest lump sum you will receive in your lifetime. If you don’t want it eaten up by taxes, you will want to take advantage of an important tax-free benefit — employer-provided pre-retirement counseling — before you leave your employment. Many employers make this option available to departing employees or will be open to it if you suggest it.

Consider this example. Tom is 58, single and — until Oct. 15 — earned $65,000 a year working at the local manufacturing plant where he had been a supervisor for the past 10 years. But on Oct. 15, Tom received a layoff notice from his employer, offering him a $50,000 severance package. In combination with his company-sponsored pension plan, which would provide a periodic pension of $4,000 a month, Tom decided to take early retirement.

Wisely, Tom worked with his tax and financial advisors on this pre-retirement strategy. On their advice, Tom asked that his severance be paid to him in two instalments — $25,000 on Dec. 1 and $25,000 on Jan. 2 — saving him $2,700 in income taxes over the two years.

Using an income tax estimation calculator, Tom’s advisors calculated his income taxes for 2012 and 2013. If Tom receives both his salary and the $50,000 severance in 2012, the year of retirement, his taxable income will be about $115,000 this year and $48,000 next year. This would result in a tax bill of slightly more than $33,000 in 2012 and $8,000 in 2013. The total tax bill for the two years would be slightly in excess of $41,000.

But by splitting the severance into two $25,000 amounts paid over two tax years, Tom’s taxable income will be closer to $90,000 in 2012 and $73,000 in 2013, decreasing his tax bill for the two years by $2,700, enough to cover some of his monthly bills or to contribute to his Tax-Free Savings Account or his RRSP. That’s where an investment advisor can add real value, offering tax-efficient investment products to improve performance but at the right cost.

It’s Your Money, Your Life. Pre-retirement counseling is a great investment, particularly because it’s a tax-free benefit of employment. Taking advantage of this opportunity to work with your tax and financial advisors will make you richer.

Evelyn Jacks is president of Knowledge Bureau and an expert author of 50 books on tax and tax planning, including the new Jacks on Tax, available later this month. She is also a keynote speaker at this year’s sold-out Distinguished Advisor Conference, Nov. 11-14 in Naples, Fla. Follow her on Twitter @evelynjacks.