Severance Pay Options
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Thread: Severance Pay Options

  1. #1
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    Severance Pay Options

    Canadian government employees are being given a one-time severane payout because the current plan is being cancelled.

    Unfortunately, there are only two options:

    Take it now as employment income, pay tax, invest it wherever or do whatever else with.

    Take it now without paying taxes, but it must be deposited into an RRSP. Then taxes are paid upon withdraws.

    Any thoughts on choosing one or the other? Putting it into an RRSP just defers the taxes, it doesn't save any money in the long-term.

    Thoughts?


  2. #2
    Senior Member MoneyGal's Avatar
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    Deferring tax = saving tax.

    Proof: you owe me $1. Would you like to pay me today, or would you like to pay me in 15 years?

  3. #3
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    Quote Originally Posted by J Watts View Post
    Take it now as employment income, pay tax, invest it wherever or do whatever else with.

    Take it now without paying taxes, but it must be deposited into an RRSP. Then taxes are paid upon withdraws.

    ?
    Do you need money now? if yes then option one, if not and you plan on leaving the money for retirement than option two.

  4. #4
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    Quote Originally Posted by MoneyGal View Post
    Deferring tax = saving tax.

    Proof: you owe me $1. Would you like to pay me today, or would you like to pay me in 15 years?
    That's not saving tax. If anything, that $1 is going to cost me more in 15 years than it does today.

  5. #5
    Senior Member MoneyGal's Avatar
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    Nope. We are not talking about inflated dollars. If you owe $1 in taxes, would you prefer to pay it now, or would you prefer to pay it in 15 years? The dollar is the same, it is a one-dollar coin from your wallet. The tax you (would) owe on the income today doesn't magically inflate if you defer it to later.

  6. #6
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    A loaf of bread costs $2 now but in 15 years it will cost $3. So either you pay 1/2 a loaf now, or 1/3 of a loaf in the future. It's better to pay 1/3 of a loaf (more bread left for you... although it might be stale by then!).

  7. #7
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    Depends on your marginal tax rate when you add up the severance pay, plus whatever regular wages you've earned in the year. Assuming you're going to be earning less money in retirement, it makes more sense to defer the tax in an RRSP. If you expect to be earning more down the road, then pay the tax now, and stick the money in a TFSA if you have contribution room.

  8. #8
    Senior Member the-royal-mail's Avatar
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    J Watts, I am sorry you are going through this. I agree with you about deferring tax. All you're doing there is kicking the ball down the road. In your case, you need the money to EAT! Seems to me that is your immediate goal (unless you have already signed for another job). Either way you have to pay the tax and investing money and paying RRSP fees should hardly be a consideration when you have more immediate needs for the cash. Your choices are either net cash or no cash at all. Given the choice between eating and investing I'll take the former anyday.

  9. #9
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    Royal, he is not being laid off. It is just another case of the government taking tax payer money and giving it to the employees, who really never earned it. In the past, when a government employee retired they recieved a big severance package. Why, because profit and loss are not of concern to a government and since the person who decides these things, get it too, it went on like this.

    Since most Canadians don't get this, the Tories decided to cancel it. Finally. Since many employees were expecting it, the government came up with some formula to give them something and keep them happy. New employees and the current ones going forward, will now, not recieve any severance,upon resigning.

  10. #10
    Senior Member kcowan's Avatar
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    So given that it is a bonus, use it to pay down debt and, if anything is left over, put it in a TFSA.


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