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Severance Package and RRSP? What to do?

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  • Feb 17th, 2016 10:44 am
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Newbie
Feb 14, 2016
4 posts

Severance Package and RRSP? What to do?

Hi All,

I am new here and need some help.
I just lost my job and was giving a decent severance package (6mo). I've been fortunate to find and star a new job that pays around the same within a week.
Now, I am wondering what should be the best approach to make sure I don't have to pay a huge tax bill next year. I have for habit to always max out my RRSP contribution at the end of the year. However this year, I am wondering if I should not hold on and wait for next year (2016) to contribute more to my RRSP.
Since my income for 2016 will be 1.5 times more than usual (will take me to the 46% marginal tax bracket) and that severance package is only taxed to 30%, I worry I will have a large tax bill next year...

Any advice?
21 replies
Member
Jun 29, 2010
200 posts
148 upvotes
Vancouver
You need to know the eligible portion of the severance (can be directly transfer to RRSP without RRSP limit restriction) and non-eligible portion(oposite from eligible, the amount you can put in RRSP depends on the limit.

Then you can go from there.
Deal Addict
Nov 6, 2015
1353 posts
1022 upvotes
Guelph, ON
Having 6 months severance with a new job lined up a week later is a good "problem" to have. Your plan to reserve some RRSP room for next year sounds good to me. I think I would plug some different scenarios into tax software to see what comes out best.
Sr. Member
User avatar
Feb 28, 2010
668 posts
340 upvotes
Flying over Canada
pivot14 wrote: rollover RRSP doesn't apply here..from my understanding. Rollover only apply if i worked at that place before 1996..which is not the case.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... l-eng.html
That's correct; I left a government job some time back, and could only claim 6*2000=$12000 of my retiring allowance for the 1990-1995 years as non-room rollover, the remaining fraction used RRSP room.

Check and see how your severance is classified. I think it can either be a retiring allowance lump sum, or "salary continuation". The latter would count as eligible income towards increasing your RRSP room the next year, while I don't think the former would. You may not have any choice in this, but you should check.
Deal Fanatic
Feb 15, 2006
9183 posts
3861 upvotes
Toronto
pivot14 wrote: rollover RRSP doesn't apply here..from my understanding. Rollover only apply if i worked at that place before 1996..which is not the case.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... l-eng.html
You're quite right, you cannot do this RRSP as the work is not prior to 1996.
pivot14 wrote: I just lost my job and was giving a decent severance package (6mo). I've been fortunate to find and star a new job that pays around the same within a week.
Now, I am wondering what should be the best approach to make sure I don't have to pay a huge tax bill next year. I have for habit to always max out my RRSP contribution at the end of the year. However this year, I am wondering if I should not hold on and wait for next year (2016) to contribute more to my RRSP.
Since my income for 2016 will be 1.5 times more than usual (will take me to the 46% marginal tax bracket) and that severance package is only taxed to 30%, I worry I will have a large tax bill next year...
Your 2016 RRSP contribution room, will be based on your income return filed for 2015, and the years before if you have contribution room from then. So waiting till next year, won't help to reduce income tax for this year.

Also your severance is taxed at your marginal rate, not 30%. When you get your severance this year, there will be 30% tax withheld, but unfortunately you'll need to pay more next April when you file your income tax for 2016. So keep some money saved for that big tax bill. Consider it as getting an interest free loan until next Apr.
Newbie
Feb 14, 2016
4 posts
Arrgh wrote: You're quite right, you cannot do this RRSP as the work is not prior to 1996.



Your 2016 RRSP contribution room, will be based on your income return filed for 2015, and the years before if you have contribution room from then. So waiting till next year, won't help to reduce income tax for this year.

Also your severance is taxed at your marginal rate, not 30%. When you get your severance this year, there will be 30% tax withheld, but unfortunately you'll need to pay more next April when you file your income tax for 2016. So keep some money saved for that big tax bill. Consider it as getting an interest free loan until next Apr.
You are correct... I was thinking of just keeping the rrsp room i have available for this year (~15k) plus what will be available for next year (~12k) and just make a large rrsp contribution next year since my taxable income will be much higher.
Deal Fanatic
Feb 15, 2006
9183 posts
3861 upvotes
Toronto
pivot14 wrote: You are correct... I was thinking of just keeping the rrsp room i have available for this year (~15k) plus what will be available for next year (~12k) and just make a large rrsp contribution next year since my taxable income will be much higher.
But aren't your income tax rate higher this year? (Unless you get some big raise or income next year.)

For this year, you can use the RRSP contribution room you have for this year. For next year, you should have a bigger contribution room as a result of the higher income from this year. But that higher contribution room can be used for next year's income, not this year. You have up to next Feb. to contribute to RRSP, to reduce this year's taxable income, but that's still based on RRSP room of this year.
Newbie
Feb 14, 2016
4 posts
Arrgh wrote: But aren't your income tax rate higher this year? (Unless you get some big raise or income next year.)

For this year, you can use the RRSP contribution room you have for this year. For next year, you should have a bigger contribution room as a result of the higher income from this year. But that higher contribution room can be used for next year's income, not this year. You have up to next Feb. to contribute to RRSP, to reduce this year's taxable income, but that's still based on RRSP room of this year.
Thanks Arrgh, you are correct, my income tax rate will be higher for this year 2016. Since I just received my severance package. I was wondering about my contribution for 2015 vs. 2016. Since 2016 tax rate will be higher will it not be best to wait few weeks to contribute to my RRSP for 2016 vs. doing it this week.
Sr. Member
User avatar
Feb 28, 2010
668 posts
340 upvotes
Flying over Canada
pivot14 wrote: Thanks Arrgh, you are correct, my income tax rate will be higher for this year 2016. Since I just received my severance package. I was wondering about my contribution for 2015 vs. 2016. Since 2016 tax rate will be higher will it not be best to wait few weeks to contribute to my RRSP for 2016 vs. doing it this week.
If you received the package in 2016 then it will be taxed on your 2016 return a year from now, and you can offset any RRSP contributions up through Feb 2017 against it. So once you get your official 2016 room number after doing your 2015 taxes now, you'll know the exact number you can use. Because you say it will bump you into a higher marginal tax rate, applying as much RRSP contribution as possible to the 2016 return will give you best bang for the buck. Remember that you can contribute now (first two months of 2016) and use those receipts for either 2015 or 2016 tax years. If you have any existing contributions you were planning to apply to the 2015 tax return, you may want examine carrying them over until you fill out 2016 next year. This assumes that your new job continues through this year so that it plus the lump sum push you into that higher bracket.

But if it is a lump-sum "retiring allowance" sort of thing, it won't contribute to this year's eligible income (although it will be taxed), and won't increase your 2017 room calculation - it isn't treated as salary.

I assume your "taxed to 30%" reference is the withholding that was done do the lump amount - you'll still be responsible for any tax above that 30%.
Deal Fanatic
Nov 24, 2013
6479 posts
3344 upvotes
Kingston, ON
pivot14 wrote: You are correct... I was thinking of just keeping the rrsp room i have available for this year (~15k) plus what will be available for next year (~12k) and just make a large rrsp contribution next year since my taxable income will be much higher.
Your extra room for 2017 based on 2016 income won't be there for making a first 60 days contribution in 2017 for 2016 tax year though, right? So your 2016 contribution room is the ~$15k, and the $12k for 2017 won't be available to claim against your 2016 return. Maybe I'm remembering wrong.

Since your income will be higher for 2016 tax year, it won't matter whether you contribute the $15k on March 1, 2016, or March 1, 2017 (or any date in between). It will apply to the same year.
Sr. Member
Oct 14, 2012
954 posts
728 upvotes
Woodstock
If you make a contribution now just be sure to defer/delay claiming the deduction until you complete your income tax return next year due by April 30 2017. On Schedule 7 you can state whether or not to claim all, some or none of the deduction. You must report your RRSP Contribution but you don't have to use its benefit until you tell them to. That lets you start earning tax-free income from your RRSP investments immediately but wait till the future when you are in a higher tax bracket to get any reduction in your income tax payable.
Deal Expert
Mar 25, 2005
22706 posts
3696 upvotes
Max contributions for 2015 by the end of the month. Then on March 1 contribute the next 18% for 2016. On your 2015 return claim an optimized deduction and carry forward the balance into 2016. Your optimized deduction will depend on how much above the next bracket you will be this year, also considering the middle income tax cut in effect in 2016.

If the difference between the withholding and your actual tax rate is huge, you may still owe a balance. Ensure you estimate the liability and save the cash for 2017 in your piggy bank.
Deal Fanatic
User avatar
Feb 19, 2010
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Kasakato wrote: Max contributions for 2015 by the end of the month. Then on March 1 contribute the next 18% for 2016. On your 2015 return claim an optimized deduction and carry forward the balance into 2016. Your optimized deduction will depend on how much above the next bracket you will be this year, also considering the middle income tax cut in effect in 2016.

If the difference between the withholding and your actual tax rate is huge, you may still owe a balance. Ensure you estimate the liability and save the cash for 2017 in your piggy bank.
There's no need to split the contributions between now and March 1.
Deal Expert
Mar 25, 2005
22706 posts
3696 upvotes
Conquistador wrote: There's no need to split the contributions between now and March 1.
You know the OP has not already maxed out their RRSP limit for 2015? At a 46% marginal its likely $200k+ gross.
Deal Fanatic
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Feb 19, 2010
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Kasakato wrote: You know the OP has not already maxed out their RRSP limit for 2015? At a 46% marginal its likely $200k+ gross.
Tell me what you think the distinction is between contributing now and then contributing more in two weeks.
Deal Expert
Mar 25, 2005
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Conquistador wrote: Tell me what you think the distinction is between contributing now and then contributing more in two weeks.
First 60 days vs rest of year.
Deal Fanatic
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Feb 19, 2010
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Kasakato wrote: First 60 days vs rest of year.
And how is that relevant given your previous advice about optimizing deduction for 2015 and carrying rest forward?
Deal Expert
Mar 25, 2005
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Conquistador wrote: And how is that relevant given your previous advice about optimizing deduction for 2015 and carrying rest forward?
You're mixing contribution and deduction, two different things.
Deal Fanatic
User avatar
Feb 19, 2010
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Kasakato wrote: You're mixing contribution and deduction, two different things.
One of us is confused and it isn't me.

I stand by my point that it's irrelevant (and unnecessary) to make contributions two weeks apart as you're suggesting. All would get reported as being made in the first 60 days with the majority carried forward.

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