# Severance Pay Options



## J Watts (Jul 19, 2012)

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?


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## MoneyGal (Apr 24, 2009)

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?


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## Homerhomer (Oct 18, 2010)

J Watts said:


> 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.


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## J Watts (Jul 19, 2012)

MoneyGal said:


> 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.


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## MoneyGal (Apr 24, 2009)

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.


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## Spudd (Oct 11, 2011)

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!).


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## nathan79 (Feb 21, 2011)

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.


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## the-royal-mail (Dec 11, 2009)

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.


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## OptsyEagle (Nov 29, 2009)

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.


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## kcowan (Jul 1, 2010)

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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## realist (Apr 8, 2011)

OptsyEagle said:


> 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 received a big severance package. 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.


Optsy - I am going to contract you to do a job for either $X/year and a package of other benefits, or just $X+Y and no benefits. You choose the benefits and completed the job but now I refuse to give you the benefits. Do you happily accept that?

I actually agree that it makes sense to stop offering that particular benefit based on the current job market and economic realities but to suggest that someone is undeserving of their previously agreed upon compensation is unfair. Why do people constantly begrudge people for benefits just because they don't have them? If you wanted those benefits you should have applied for those jobs.


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## Invest (Nov 8, 2012)

*Truth behind deferred tax*

Hello, I read your post and decided to register for the sole purpose of responding to it.

Hopefully my explanation will help with your decision as I have recently been helping multiple clients in even more complicated severance packages.

I'm going to make some simple assumptions so we can do some easy math.

#1. The amount your receiving is $50,000. This is just an easy number to work with
#2. If it was invested it would grow at 5% compounding for 20 years until your retirement. 5% is conservative, and 20 years to retirement is a fair average time period.
#3. Your tax bracket is 30% now and will be 35% when you retire.
#4. That you do not need any of the cash immediately as you are still employed and this is simply a bonus.

With that taken care of here goes,

Option #1: Take the cash as employment income and then invest it.
Taxable Portion: 50,000 * .30 = $15000
Remaining: 50,000-15000 = $35000
$35000 invested for 20 years at 5% in your TFSA = $92,865
Value after tax = $92,865.

Option #2: Transfer it to RRSP
Taxable Portion: 50,000 * 0 = 0
Remaining = $50,000
$50,000 invested for 20 years at 5% in your RRSP = $132,665
Taxable at 35%: 132,665 *.35 = 46,432
Value after tax: 132665-46432 = $86,233.


Two things to keep in mind:
#1. Option 1 assumes you invest the money and never touch it. (Which in my experience is very very unlikely to happen because a TFSA has so much liquidity)
#2. At approximately $200,000 and greater the RRSP generates better returns, while at $200,000 and lower the TFSA does

I used the financial calculator available at http://mackenziefinancial.com/en/pub/tools/calculators/index.shtml for my 20 year investment calculations.


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