Laid off? Protect your severance package
By Gordon Powers, Sympatico / MSN Finance
The worst recession in decades is not choosing favourites, hammering Canadian workers across the country. Among the hardest hit are the 1,300 Nortel employees who got axed last fall only to find their severance payments gobbled by the company’s bankruptcy filing.
Legal, sure, but it hardly seems fair. And even those firms that don't bail out this way are still able to get away with some pretty modest settlements.
In Ontario, for instance, someone who has worked for the same employer for five or more years is entitled to one week per year up to a maximum of 26 weeks, providing the employer has an annual payroll of $2.5 million or more. Employees of smaller employers are out of luck, however.
Still, some companies do try to make good when it comes to looking after those they’re forced to lay off. If you find yourself in this circumstance, what’s it to be: Take the money in a lump sum or go with smaller payments over time?
Employment benefits aside, people generally choose a lump-sum amount over a stream of payments for two reasons. They want to get as much distance from their former employer as possible. And they don't want to short change themselves if they find another job. Some companies will stop the continuing payments as soon as you're employed again though. So, you could end up with less money overall.
Remember that what you see isn't always what you get. First off, the government will automatically impose a 30 per cent withholding tax on your severance. Opting for a continuing stream of payments means the taxes may be paid more gradually — not in one year, as could happen with a lump-sum payment.
Either way, putting some or even all of your severance into an RRSP can help cut the tax bill, particularly if you’ve been in the same job for awhile. You can roll over $2,000 a year tax-free for each year of service before 1996 into an RRSP, more if you weren't always in a pension plan. Even if you don't qualify for a tax-free rollover, you can use your severance to top up your RRSP — as long as you have unused contribution room — to save on withholding tax.
Even if you need some of the funds fairly soon, you can withdraw them gradually when needed, perhaps when you’re in a lower tax bracket.
Have you or friends and family been on the wrong side of this equation?