# Government severance pay - RRSP or cash it out?



## rstl2011

Hi all,
I am soon retiring from federal public service at age 55.
My pension will be around $60,000 annually.
I have about $55,000 in an RRSP already.
I don't have any debts (mortgage paid for), but don't have sizable non-RRSP investments.
I was going to rollover most of the severance pay (about $40,000) into my RRSP, but am now wondering if I shouldn't consider cashing it out instead.
Are there any considerations to decide on the best approach:
1. roll it into RRSP
2. cash it out, pay the tax now, and invest the rest in TFSA, or other means
Thanks.


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## sprocket1200

wow, this is why i love gov't pensions!!!


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## I'm Howard

RRSP, then withdraw over five years, spend or put money into TFSA.

CPP can be started at 60.

I expect, if you are the norm, from your Pension you will still be able to save about $20,000 a year.


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## Maltese

rstl2011 said:


> Hi all,
> I am soon retiring from federal public service at age 55.
> My pension will be around $60,000 annually.
> I have about $55,000 in an RRSP already.
> I don't have any debts (mortgage paid for), but don't have sizable non-RRSP investments.
> I was going to rollover most of the severance pay (about $40,000) into my RRSP, but am now wondering if I shouldn't consider cashing it out instead.
> Are there any considerations to decide on the best approach:
> 1. roll it into RRSP
> 2. cash it out, pay the tax now, and invest the rest in TFSA, or other means
> Thanks.


If I were you I'd roll the $40,000 into your RSP. If you take the cash, the $40,000 will be added to your income for the year and likely to be taxed close to 50%. This would only leave you about $20,000 in cash.

If the funds are put into an RSP, you can take out the money gradually and likely pay less tax on the withdrawals.

Don't forget that your pension amount will decrease when you turn 65 and begin to receive OAS.

I hope this helps.


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## atrp2biz

50?!? LOL.

What am I missing?


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## rstl2011

I'm Howard said:


> RRSP, then withdraw over five years, spend or put money into TFSA.
> 
> CPP can be started at 60.
> 
> I expect, if you are the norm, from your Pension you will still be able to save about $20,000 a year.


Thanks Howard, sounds like a very sensible approach. 
We'll see about the saving  (the $60K pension is before taxes, obviously...)



Maltese said:


> If I were you I'd roll the $40,000 into your RSP. If you take the cash, the $40,000 will be added to your income for the year and likely to be taxed close to 50%. This would only leave you about $20,000 in cash.
> 
> If the funds are put into an RSP, you can take out the money gradually and likely pay less tax on the withdrawals.
> 
> Don't forget that your pension amount will decrease when you turn 65 and begin to receive OAS.
> 
> I hope this helps.


Thanks Maltese, sounds good!

Coincidentally, I found this article last night which is very much along the lines just discussed:

http://www.financialpost.com/personal-finance/wealthy-boomer/branch-investing/Retire+early+might+actually+save+money/4230335/story.html

Cheers!


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## Guest

rstl2011 said:


> Hi all,
> I am soon retiring from federal public service at age 55.
> My pension will be around $60,000 annually.
> I have about $55,000 in an RRSP already.
> I don't have any debts (mortgage paid for), but don't have sizable non-RRSP investments.
> I was going to rollover most of the severance pay (about $40,000) into my RRSP, but am now wondering if I shouldn't consider cashing it out instead.
> Are there any considerations to decide on the best approach:
> 1. roll it into RRSP
> 2. cash it out, pay the tax now, and invest the rest in TFSA, or other means
> Thanks.


Fwiw ... you may be eligible to defer your RPP to age 60. If so, you might consider putting the $40K into your RSP and living off the RSP ($40K plus $55K) for a year or 3 to minimize tax, then collect your RPP ... or maybe you're an investor and prefer the RSP to grow.

If your RPP is $60K that suggests your income is about $80K ... $80K plus $40K is $120K ... about $30K tax my understanding. You can do the math on the savings by contributing to the RSP now and paying the tax later.


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## OhGreatGuru

rstl2011 said:


> Hi all,
> I am soon retiring from federal public service at age 55.
> My pension will be around $60,000 annually.
> I have about $55,000 in an RRSP already.
> I don't have any debts (mortgage paid for), but don't have sizable non-RRSP investments.
> I was going to rollover most of the severance pay (about $40,000) into my RRSP, but am now wondering if I shouldn't consider cashing it out instead.
> Are there any considerations to decide on the best approach:
> 1. roll it into RRSP
> 2. cash it out, pay the tax now, and invest the rest in TFSA, or other means
> Thanks.


Before you get ahead of yourself, do you actually have $40K RRSP room? 

The additional room for retiring allowances is calculated as described in Chart 8 of T4040. _"The eligible part is $2,000 for each year or part-year of service before
1996 in which you were employed by the employer or a person related to that employer from whom you received the retiring allowance. You can also transfer an additional $1,500 for each year or part of year of a year of service before 1989 in which you had earned no pension or DPSP benefit from employer contributions that were either vested in you at the time of payment or that were previously paid to you."_

In principle though, I would agree with rolling it over to avoid the big tax hit in one year. Mind you, a lot of people retire early in the calendar year for the same reason - the reduced pension income partially offsets the retiring allowance.


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## Eclectic12

OhGreatGuru said:


> Before you get ahead of yourself, do you actually have $40K RRSP room?
> 
> The additional room for retiring allowances is calculated as described in Chart 8 of T4040. _"The eligible part is $2,000 for each year or part-year of service before
> 1996 in which you were employed by the employer or a person related to that employer from whom you received the retiring allowance. You can also transfer an additional $1,500 for each year or part of year of a year of service before 1989 in which you had earned no pension or DPSP benefit from employer contributions that were either vested in you at the time of payment or that were previously paid to you."_
> 
> In principle though, I would agree with rolling it over to avoid the big tax hit in one year. Mind you, a lot of people retire early in the calendar year for the same reason - the reduced pension income partially offsets the retiring allowance.


+1 for confirming that there is enough available RRSP room for the severance pay. I'm assuming the mentioned pension is likely a defined benefit (db) plan where the pension adjustment (PA) has been reducing the earned RRSP contribution room each year.

However, I am confused by a couple of things:

a) if this is an employee requested retirement - why is there severance pay?
Or is this another perk of the federal public service?

b) if the $40K is run of the mill severance pay, shouldn't the critical question be whether the RRSP contribution room has already been earned? The T4040 info/quote is interesting but I don't see why severance pay would be prevented from being contributed to an RRSP - assuming the necessary contribution room has been earned before it is paid. Or am I missing something?


Cheers


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## OhGreatGuru

Eclectic12 said:


> a) if this is an employee requested retirement - why is there severance pay?
> Or is this another perk of the federal public service?
> 
> b) if the $40K is run of the mill severance pay, shouldn't the critical question be whether the RRSP contribution room has already been earned? The T4040 info/quote is interesting but I don't see why severance pay would be prevented from being contributed to an RRSP - assuming the necessary contribution room has been earned before it is paid. Or am I missing something?
> 
> Cheers


a) This is a long-running battle in the minds of the public (and the CD Howe/Fraser/CDN Taxpayer - Institutes of the world) over the meaning of "severance pay" in the federal public service ( and I believe in a number provincial public services. ) Many years ago I believe it may have been called "long service pay". Today it would be better to call it a "retiring allowance", since that is what CRA calls it. Unfortunately some bureaucrats at Treasury Board many years ago revised the collective agreements to categorize it under the heading of 'severance pay', along with involuntary severance. Without considering the obvious optics problem that would be created.

Understandably, in the minds of the general public, severance pay is for involuntary severance. Hence the frequent outrage over this "perk".

The public servants' defence is that this is part of the collective agreement, and is a form of "deferred wages", forming part of the overall pay & benefits package that is negotiated for. You may be aware that there is a move afoot from Treasury Board to eliminate this provision from contracts, in exchange for a very small wage increase in new contracts. It looks like PSAC has agreed to this, but other unions are not convinced it is a good trade. 

b) The "severance" the OP is writing about is classified as a "Retiring Allowance" by CRA. As described in CRA T4040, depending on when the service was earned, it may be eligible for an "extra" RRSP allowance. You will note that employment years after 1996 do not qualify, so this allowance room is being gradually phased out. (From his original post post, I was guessing he may have already used most of his eligible RRSP room, because after the pension adjustment a DP pension contributer doesn't earn a whole lot of RRSP room annually.)


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## Eclectic12

OhGreatGuru said:


> a) This is a long-running battle in the minds of the public (and the CD Howe/Fraser/CDN Taxpayer - Institutes of the world) over the meaning of "severance pay" in the federal public service ( and I believe in a number provincial public services. )
> 
> [ ... ]
> 
> b) The "severance" the OP is writing about is classified as a "Retiring Allowance" by CRA. [ ...]
> (From his original post post, I was guessing he may have already used most of his eligible RRSP room, because after the pension adjustment a DP pension contributer doesn't earn a whole lot of RRSP room annually.)


Thanks for the clarification. Not being a civil servant, I wasn't aware of the issue.

Being in several db plans, I'm *well* aware of the effects of a PA on RRSP contribution room. And fortunately due to the timing of my first db plan exit, I'm also familiar a Pension Adjustment Reversal (PAR).

Historical trivia - I'm still not sure why an ice storm in Ottawa resulted in an additional year delay before finding out the value of my PAR. Such is the world we live in!

Cheers


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