Evelyn Jacks:  Minimize Tax on Severance

Retirement planning may begin for you–quite unexpectedly–with the receipt of a retiring allowance or severance package from your employer.  

Aside from the shock of such an unexpected life event, for some people this is the largest lump sum of money they will receive in their remaining lifetime, so it needs to be carefully managed. Retiring allowances may also be paid in instalments over a period of years. Both these payment options are important considerations in planning at year end.

For example, you may wish to ask whether your employer will consider paying your severance in two lump sums: part in the current tax year and the balance early in the new year. That will help you defer the tax to April 2015 and could save you several percentage points in your marginal tax rate, too, if income will be lower in 2014. 

If you have unused RRSP contribution room, consider contributing as much of your severance as possible to fill up that room within 60 days of the end of 2013 so that the offsetting tax deduction can reduce your taxes owing on the severance and preserve refundable and non-refundable tax credits you may be entitled to in the new year. In some cases, an RRSP rollover may be allowed over and above your contribution room.

It’s Your Money. Your Life. Make a point of seeing a tax professional before you make plans for your severance. You may be shocked at the size of an unexpected tax bill, something you will want to know about earlier rather than later so you can plan appropriately. If you dispute your settlement, you may be able to claim some of your legal fees, too.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.