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How do I make the most off a lump sum payment from work?

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  • May 25th, 2012 8:53 pm
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Deal Fanatic
Sep 21, 2004
8687 posts
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How do I make the most off a lump sum payment from work?

Looking for some advice from you finance experts.

Through some stuff going at on work, I will be getting a fair sized lump sum payment. I have 3 options:

1) Take it all now and have it taxed accordingly
2) Take it tax free by contributing it to RRSP
3) Combo of the above (% split according to my wish)

My first instinct was to go option 2 and contribute all of it into spousal RRSP, however, upon some more research, it doesn't seem as good of an idea. i) Can't touch it for 3 years ii) Wife's tax bracket is only marginally less. The only way this would seem to work is if she is not working some time after 2015, and then we would still take a bit of cut due to reduced spousal credit.

So now I'm looking at just going option 1 and taking the money now since option 2 wouldn't actually save us very much. While we don't "need" the money right now, we could certainly make use of it now or in a time frame very close to now.

Do I have any alternatives that I haven't looked at yet? I want to have this lump sum taxed as little as possible or used as effectively as possible in an immediate/soon time frame, but it looks like either way it works out to being roughly the same. Is this the case?

TIA.
8 replies
Deal Addict
Aug 1, 2008
1554 posts
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Ottawa
Stock R wrote: Looking for some advice from you finance experts.

Through some stuff going at on work, I will be getting a fair sized lump sum payment. I have 3 options:

1) Take it all now and have it taxed accordingly
2) Take it tax free by contributing it to RRSP
3) Combo of the above (% split according to my wish)

My first instinct was to go option 2 and contribute all of it into spousal RRSP, however, upon some more research, it doesn't seem as good of an idea. i) Can't touch it for 3 years ii) Wife's tax bracket is only marginally less. The only way this would seem to work is if she is not working some time after 2015, and then we would still take a bit of cut due to reduced spousal credit.

So now I'm looking at just going option 1 and taking the money now since option 2 wouldn't actually save us very much. While we don't "need" the money right now, we could certainly make use of it now or in a time frame very close to now.

Do I have any alternatives that I haven't looked at yet? I want to have this lump sum taxed as little as possible or used as effectively as possible in an immediate/soon time frame, but it looks like either way it works out to being roughly the same. Is this the case?

TIA.
Your wife's (current) bracket doesn't matter with a spousal....the contribution amount is deducted from your income and your
contributiuon limit the same as a regular contribution. The purpose is to even out taxes at point of retirement if there is an
uneven distribution of tax rates now
Deal Fanatic
Sep 21, 2004
8687 posts
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SpillOnAisle9 wrote:

Your wife's (current) bracket doesn't matter with a spousal....the contribution amount is deducted from your income and your
contributiuon limit the same as a regular contribution. The purpose is to even out taxes at point of retirement if there is an
uneven distribution of tax rates now
Thx.

The reason why I mention her bracket is because I plan on withdrawing as early as possible. It's not actually for retirement. We both have good pension plans. Just trying to maximize the amount we can pocket now or around now.
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Dec 11, 2005
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Stock R wrote: Thx.

The reason why I mention her bracket is because I plan on withdrawing as early as possible. It's not actually for retirement. We both have good pension plans. Just trying to maximize the amount we can pocket now or around now.

If you are planning on taking it all out that quickly then it does not make a lick of difference which of these you do as your tax burden will be roughly identical.
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Jan 27, 2007
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T.
You are going to have to pay tax at your marginal rate whether you take it now or deposit to rrsp and withdraw later.

I wouldnt waste the rrsp room.

Take the cash. You may be taxed higher now but will receive a refund when you file taxes in 2013.

If you can delay taking the payment until.you reach max for cpp and ei do that. Alternatively you will reach the max quicker.
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Mar 25, 2012
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ETOBICOKE
dutchca wrote: You are going to have to pay tax at your marginal rate whether you take it now or deposit to rrsp and withdraw later.

I wouldnt waste the rrsp room.

Take the cash. You may be taxed higher now but will receive a refund when you file taxes in 2013.

If you can delay taking the payment until.you reach max for cpp and ei do that. Alternatively you will reach the max quicker.

This is the best advice. Alternatively, if her employer is willing, I've seen cases where the lump sum gets split into 12 and paid monthly, basically giving a second monthly salary. Of course that doesn't affect taxation.
Deal Addict
Jan 3, 2009
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dcyeung wrote: take it all and buy facebook stocks

Might as well take it to the washroom and flush it with your morning deuce.
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Jun 7, 2001
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Alberta
For severance pay or retiring allowance over $15,000, the withholding tax is 30%. The percentages are less and varied if under $15,000.The choice depends on whether you will need the remaining money in the very near future. If not and you have excess room for RRSP contributions, then put it all or most of it in your RRSP account.

Dave

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