Plan for a Tax-Efficient Retiring Allowance

Employees who are leaving their jobs and who receive job termination payments or retiring allowances should do some tax planning, perhaps with RRSP contributions and other income splitting or deferral options.

Here are some tips to do so:

How can I keep more of my severance package? An RRSP contribution can help you keep more of your retiring allowance. If adding your retiring allowance to your income brings you into a higher tax bracket, you should consider transferring at least enough of the retiring allowance to your RRSP so that you don’t go into that higher tax bracket.

Can an RRSP help? You may receive an “eligible” retiring allowance or an “ineligible” allowance, and this will show up on your T4 slip. Tax planning opportunities include the following:

Eligible Allowances. The portion of your retiring allowance that is “eligible” can be transferred into your RRSP, even if you don’t have any contribution room. The effect of such a transfer is that you won’t have to pay taxes on that portion of the retiring allowance until you take that money out of your RRSP.

Ineligible Allowances. The portion of your retiring allowance that is “ineligible” can also be transferred to your RRSP, but only if you have enough contribution room to cover the contribution.

Evelyn Jacks is President of Knowledge Bureau, home of the MFA-Retirement and Estate Planning Designation.  Call 1-866-953-4769 to register.

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