A terrible side effect of the economic turmoil sweeping the globe is the increasing number of jobs that are being eliminated.
And that means many people – from the shop floor to the executive suite – are walking out the door with large severance payments and not really knowing how to handle what are often big lump-sum payments.
Carol Bezaire, vice-president with the tax and planning practice of Mackenzie Financial, knows what they're going through.
"I've been severed twice," Bezaire said in an interview. "The shock of it never goes away, even if you know it's coming."
Many economists predict the Canadian unemployment rate will jump above 8 per cent next year, from 6.3 per cent near the end of 2008, and about 200,000 jobs are expected to be lost in 2009.
Federal and provincial labour laws vary regarding notice of termination and severance payments.
In Ontario, for example, an employee regulated under the provincial Employment Standards Act who has worked for five years or more at a company with a payroll of $2.5 million is entitled to a severance payment of one week per year, up to a maximum of 26 weeks.
That means many longer-term employees who lose their jobs could leave their companies with lump-sum or structured payments of $50,000 or more.
That raises all sorts of questions for those who get that money – from taxes paid on severance to tax-limiting strategies and impact on pensions.
People with such severance payments should stop the perfectly natural inclination to pay off as many bills as possible.
In fact, Bezaire thinks that is the worst thing you can do.
"It's like, `Okay, I've got all these bills,'" Bezaire said.
"And the first thing you do is, instead of taking a look and seeing how much you can preserve from the government, take it all out and pay off bills and you have nothing as a cushion if it takes you two or three or four months to get yourself another job."
It's better to take some time to regroup, she advises.
"You need time because the second mistake people make is they either jump into another job and take a hit on their income because everybody takes less of a salary when they start up at a new place, or they take too much time out of the market and have nothing to show for themselves if they take a year off."
What can often be a big mistake is taking your severance payment in one big chunk, particularly if you are terminated close to the end of the year.
Instead, consider how you can use it to increase the holdings in your registered retirement savings plan.
"There are still some opportunities to directly transfer money to your RSP on a rollover basis, where you don't need to use the (RSP) contribution room," Bezaire observed.
"If you need to take some lump sum out of it, that's fine.
"But if you take it all at one time, you get hit (by taxes). Because they're generous payouts, you're going to lose about 46 per cent of it to the government."
And don't forget, the government will automatically impose a 30 per cent withholding tax on your severance.
So, if you get terminated late in the year, ask your soon-to-be-ex-employer if you can get that final payment in January – something most companies will do, Bezaire said.
You wouldn't get such a big tax hit if terminated early in the year, simply because you likely haven't earned that much money in the first few months in the year.
You could also ask to have your severance paid out gradually over a period of months, much like a salary.
Then there's the question of pensions.
If you have a company pension – or a defined benefit plan that guarantees you a certain amount every month – Bezaire sees an increasing desire for people to look at commuting their pension.
"Meaning, you take the lump-sum value out of it," she said.
"You can roll your contributions over into a locked-in RSP."
However, she thinks you would want to leave the pension alone if you are lucky enough to work for a company that has an indexed defined benefit plan.
For the majority of Canadians who have a defined contribution plan, where you and the company pay money typically into a group RSP – you can transfer the tax deferred cash into your own RSP.
Perhaps most importantly, talk to your financial adviser about what to do with your severance – and if you don't have one, go into a bank and ask to talk to one.
http://www.thestar.com/Business/article/561073
And that means many people – from the shop floor to the executive suite – are walking out the door with large severance payments and not really knowing how to handle what are often big lump-sum payments.
Carol Bezaire, vice-president with the tax and planning practice of Mackenzie Financial, knows what they're going through.
"I've been severed twice," Bezaire said in an interview. "The shock of it never goes away, even if you know it's coming."
Many economists predict the Canadian unemployment rate will jump above 8 per cent next year, from 6.3 per cent near the end of 2008, and about 200,000 jobs are expected to be lost in 2009.
Federal and provincial labour laws vary regarding notice of termination and severance payments.
In Ontario, for example, an employee regulated under the provincial Employment Standards Act who has worked for five years or more at a company with a payroll of $2.5 million is entitled to a severance payment of one week per year, up to a maximum of 26 weeks.
That means many longer-term employees who lose their jobs could leave their companies with lump-sum or structured payments of $50,000 or more.
That raises all sorts of questions for those who get that money – from taxes paid on severance to tax-limiting strategies and impact on pensions.
People with such severance payments should stop the perfectly natural inclination to pay off as many bills as possible.
In fact, Bezaire thinks that is the worst thing you can do.
"It's like, `Okay, I've got all these bills,'" Bezaire said.
"And the first thing you do is, instead of taking a look and seeing how much you can preserve from the government, take it all out and pay off bills and you have nothing as a cushion if it takes you two or three or four months to get yourself another job."
It's better to take some time to regroup, she advises.
"You need time because the second mistake people make is they either jump into another job and take a hit on their income because everybody takes less of a salary when they start up at a new place, or they take too much time out of the market and have nothing to show for themselves if they take a year off."
What can often be a big mistake is taking your severance payment in one big chunk, particularly if you are terminated close to the end of the year.
Instead, consider how you can use it to increase the holdings in your registered retirement savings plan.
"There are still some opportunities to directly transfer money to your RSP on a rollover basis, where you don't need to use the (RSP) contribution room," Bezaire observed.
"If you need to take some lump sum out of it, that's fine.
"But if you take it all at one time, you get hit (by taxes). Because they're generous payouts, you're going to lose about 46 per cent of it to the government."
And don't forget, the government will automatically impose a 30 per cent withholding tax on your severance.
So, if you get terminated late in the year, ask your soon-to-be-ex-employer if you can get that final payment in January – something most companies will do, Bezaire said.
You wouldn't get such a big tax hit if terminated early in the year, simply because you likely haven't earned that much money in the first few months in the year.
You could also ask to have your severance paid out gradually over a period of months, much like a salary.
Then there's the question of pensions.
If you have a company pension – or a defined benefit plan that guarantees you a certain amount every month – Bezaire sees an increasing desire for people to look at commuting their pension.
"Meaning, you take the lump-sum value out of it," she said.
"You can roll your contributions over into a locked-in RSP."
However, she thinks you would want to leave the pension alone if you are lucky enough to work for a company that has an indexed defined benefit plan.
For the majority of Canadians who have a defined contribution plan, where you and the company pay money typically into a group RSP – you can transfer the tax deferred cash into your own RSP.
Perhaps most importantly, talk to your financial adviser about what to do with your severance – and if you don't have one, go into a bank and ask to talk to one.
http://www.thestar.com/Business/article/561073