Q: Last week, I was offered a retirement package. I worked for more than 30 years at the same company. The package is just more than $100,000. I estimate my RRSP contribution limit at approximately $14,000, based on if I take this package and retired in four months. To minimize my income taxes should I contribute to my wife’s RRSP? Can you suggest other ways to reduce my income tax burden?
A: Should we spend as our governments are prompting us to do or save and invest for our retirement? For the average taxpayer, contributions to an RRSP offers tax savings in the year of the contribution, a deferral of income taxes from the income earned from the investments and a tidy sum of money for retirement that complements the government’s Old Age Security (OAS) and Canada Pension Plan (CPP).
Here are several options for you to consider that could minimize your income tax obligation:
Contribute the maximum RRSP deduction limit for the year. Check your prior year’s income tax assessment for RRSP deduction limit. To do a quick check, this amount is determined by adding the current year’s limit. This is the lesser of: 18 per cent of your prior year’s earned income (less pension adjustments) and $19,000. Also add your carry-forward RRSP amounts not previously deducted in prior years.
Rollover to an RRSP for special eligible payments received. Under the income tax act, specific amounts received due to recognition of long service of employment may qualify to be transferred into a special RRSP. The eligible retirement allowance is determined by the number of employment years of service between 1989 and 1995 multiplied by $2,000 and the number of years prior to 1989 times $3,500. Depending on the circumstance, you may qualify for approximately $50,000 as a retirement allowance that maybe rolled into an RRSP. This amount is above and beyond your normal deduction limit.
If your retirement package is received over more than one year, you must report the amounts as they are received. Payments received over several years will effectively reduce your marginal tax rate and result in lowering the tax payable. Speak to the human resource department of your firm and discuss if this is an option.
A contribution to a spousal RRSP will not necessarily reduce your income taxes, as your total contributions to you and your spouse’s RRSP cannot exceed the deduction limit for the year. Before accepting any package, speak to your accountant or lawyer to determine the conditions, if the amount is sufficient, particularly for younger workers and the tax consequences.
Henry’s tax tips (individual):